Are you applying for a home loan soon? If so, one of the most important things you can do is check and protect your credit score. Your credit score will be one of the key factors we assess. That means that if your score is high, you may qualify for more competitive rates and features for your mortgage.
Alas, borrowers sometimes end up standing in their own way by making poor decisions with their credit when they apply for a home loan. Those missteps can be costly over the years to come. Below, we go over some top mistakes to avoid.
Factors To Consider When Applying For a Mortgage
- Check your credit reports. You know what your credit score is, but do you know what your credit report is? Have you ever checked it? Consumers sometimes think their credit report and credit score are identical, but they are not. Your score is a numerical representation of your risk level, while your report contains data about your credit history. Credit scores are generated using info from credit reports. The Consumer Finance Protection Bureau says, “According to a study conducted by the Federal Trade Commission, one in five people have an error on at least one of their credit reports.” However shocking it might be that major credit bureaus make such frequent errors, it is still the case. And it is up to you to check their work, as they are not going to find those errors on their own. So, order your free credit report, and see if everything looks accurate. If you discover a mistake, you can contest it and repair your score.
- Delay Cosigning a Loan. Has a friend or relative asked you recently to help them qualify for a loan by co-signing on it? It could be a mistake to proceed with granting that request prior to completing your mortgage process. Doing so can have a negative impact on your credit score since you are assuming responsibility for the loan on which you are co-signing. The best decision is to wait until afterwards to grant this favor. Once you have closed, then you can cosign for someone.
- Limit changes to credit accounts. Borrowers who want to raise their credit scores prior to applying for a mortgage frequently make the mistake of adding or removing credit accounts and lines of credit. The thinking is that opening lines of credit could add to credit diversity, or that closing unused accounts could help “clean things up” in some fashion. But both of these actions tend to have the opposite of the desired effect. The likeliest outcome is actually a decrease in your credit score, not an improvement. One of the reasons applies in both cases, and that is that the average age of your credit goes down when you add or remove accounts. The other reason applies only in the case of opening new accounts, and that is that during the application process since lenders running hard credit checks can decrease your score.
- Limit major purchases on credit cards. Finally, there is another common mistake we see with borrowers who are taking out a mortgage, and that is jumping the gun with major purchases, and making them on credit. For example, if you are moving from a smaller home into a larger one, chances are good that you are going to require more furnishings than you currently own. You may feel eager to buy those furnishings so that they are ready when you move into your new house. But they are expensive, so you probably are going to purchase them on credit.
If you use a lot of credit to cover your purchases, then your credit utilization ratio will increase, resulting in your score declining. For that reason, you should look for another way to pay for these purchases if you have not yet closed on your new home. You could also wait until after you complete your home purchase to shop for furnishings or make other large payments using a line of credit.
Learn More About Managing Your Credit Score When Applying for a Home Loan
If you are ready to apply for a mortgage in Virginia, First Residential Mortgage can help you to assess how your credit score may affect your loan application. We can also provide you with personalized recommendations to increase your score. To get started now, please call us today at (540) 838-5868 to schedule your consultation!