Successfully navigating the mortgage process can be tricky, so being well-prepared is vital. The biggest mistake many home buyers make is not getting their financial affairs in order before they start looking for a home. Lenders look at your buying a house as a “big deal.” You may not think so. But lenders think so! Here are some common and potentially damaging misconceptions:
1. I have always paid for everything in cash or with a debit card, so I have never had a late payment on anything. My credit should be really good, right! Not necessarily.
Your credit history is one of the most important single factors in determing whether your loan is approved and what the interest rate and terms (such as loan discount points) will be, but you must have a history. If you pay for everything in cash or with a debit card, then you haven’t done anything to establish your creditworthiness. You need to get credit and establish a history of making credit card or installment payments on time.
2. I have been able to get credit whenever I applied for it, so my credit to buy a house must be fine.
Maybe. But, obtaining a mortgage isn’t the same as getting other types of credit, especially since mortgage lenders are extra picky these days. Make sure there are no errors on your credit report that can lower the score derived from it, which is the number lenders look at. Check your report for inaccurate information or omissions and get mistakes corrected in advance of applying for a mortgage. You need to check all three credit reporting companies — Equifax, Experian and TransUnion. Common errors that can hurt your score include: not clearing a balance when a loan has been paid off, listing accounts you’re not responsible for or failing to include a credit account.
You are entitled to one free report from each of the agencies every twelve months. To obtain one, go to www.annualcreditreport.com or call 877-322-8228. If you find an error, you need to dispute (correct) it. A fact sheet at the Federal Trade Commission web site, www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports tells how to dispute errors and order free reports. The credit reporting companies will charge you if you want to see your credit score (the report is free, not the score). An alternative is to ask your mortgage advisor to run your report, let you know your scores, and if needed, advise you about how to improve them.
3. I need to raise my credit score, so I am going to close some credit lines.
No, no, no! Closing lines hurts, not helps your credit score. The relationship between your available credit and what you owe, along with how long you have been managing that credit, is what determines your score. Similarly, consolidating several cards into one is bad because you now have an unfavorable “maxed-out” card. Having lots of available credit and using a small percentage of each is what scores higher. Understand that a long, pristine credit history is an extremely valuable commodity. The longer you have a good history with a creditor, the better.
4. Our mortgage has been approved, so now we can go ahead with plans to buy new furniture and a car, right?
No, no, again! Getting a new loan for a car or a lot of furniture on credit will significantly, unfavorably and perhaps fatally alter your debt ratios. Further, the new loan will not have a payment history, so that, too, will lower your credit score. You can even damage your score just by having a store run your credit, even if you don’t wind up buying. And don’t take those realtor offered “$25 bonus just signing up” cards. This is a problem even if you have already been approved because lenders run credit scores again right before settlement to make sure that nothing has changed for the worse. If it has, maybe no house.
5. I just got a job closer to the new house and it has a lot of opportunity for advancement. How great is that!
Uh, not as great as you might think. Lenders also double-check loan applications before settlement to verify that you are still working at the job you listed on the application. If you leave your old job before settlement in anticipation of starting new employment, even if the job is better or closer to the new home, you may no longer qualify for the loan. So hold off on any workplace changes for just a bit. Talk to your Realtor to get an “employment verification letter” stating salary and start date from the new employer.