It's not fun to be denied a mortgage, and credit glitches are not uncommon. But there are some proven ways to better your chances and sail through the mortgage approval process.
Below are 7 things you must pay attention to if a buying a home and obtaining a mortgage is in your future.
Please note, that we are not mortgage lenders. For mortgage advice specific to your home-buying needs & financial situation, always consult with a licensed mortgage professional.
Obtain Updated Credit Reports
Well in advance of the time you plan to begin your home search and getting pre-approved for a mortgage, order free credit reports from the three major reporting firms.
If you have limited knowledge of how to interpret the credit report, or if you have some known credit abnormalities, seek informed advice or search online sources in an effort to fully understand the problems. Know that the report you will be supplied by the agencies does not always include all the information that a lender will see; often the actual credit score the lender will use for your application is withheld from the consumer.
Limit Use of Credit
Having a lot of credit cards or a higher than needed credit limit is not always a good thing. Be as judicious about your "access to credit" as you are about your monthly charges.
Having a charge account at every retail outlet is not a goal that will win you points on your credit report. It is better to have a reasonable limit -- and an easily payable monthly balance on one or two national cards -- than to have available and unused credit on a dozen or more cards. Also, as counterintuitive as it may seem, zero balances are not always deemed to be favorable marks. While there isn't a single particular credit utilization percentage that fits for all home buyers, generally speaking, most experts agree that a good credit utilization ratio is between 3 to 10 percent of the total credit limit.
Take Care of Credit Report Errors
Always settle disputes and keep records of any credit problems you have encountered in the past. Be able to supply names, dates and resolution details. Lenders will ask for an explanation of anything that raises questions, even if the problem is years in the past.
Pay Debts Consistently
Consistency is Golden: Paying debts regularly over an extended period of time is more important than having a low or zero balance. Mortgage lenders focus on your spending and paying habits. They will look critically at a repeated pattern of large purchases that you pay off in irregular fashion. That sort of "binge and pay" routine signals a potential risky approach to finances.
Mortgage lenders look for signs of responsible money management. Often, that means simply making the required payment on or slightly before each month's due date, using earned income sources to repay debt, and not dipping into cash reserves for expenditures made on impulse.
Limit or Eliminate Major Purchases
As long as your salary and job history support your continuing ability to repay, a lender will look favorably on a credit report that shows a history of responsible payment. What will raise red flags in an underwriter's mind are high-dollar expenditures for vacations and luxury items within a few months prior to mortgage application, even if they have been paid in full.
A financial analyst would probably advise taking "staycations" and growing your savings account if you are serious about buying a home.
Be Up-Front About Personal Finances
Always be upfront and honest with a potential lender or financial adviser. Past, present and possible future credit unworthiness is serious, but there are steps you can take to repair less than stellar credit, in order to maximize your chances of securing a loan. Don't hesitate to ask questions and seek professional advice. Set a budget and begin a savings plan if you haven't done so already.
Finally, as a part of collecting the necessary documentation prior to loan application, always review your preliminary credit report with your mortgage broker or loan officer before you proceed. It's much better to delay your dream of home ownership than to have your hopes dashed by a mortgage rejection.
If your road to a mortgage contains some potholes, work on repairs before you face a disappointing rejection. Knowledge is power, and having a positive plan will save you a lot of angst.