Avoid These 5 Costly Credit No-No’s to Get Approved for your Home Loan
April 30, 2009
Currently, there is a special loan program in place for consumers to receive federally-sponsored financing to allow them to keep their home if they are at risk of foreclosure. The White House enacted the Homeowner Affordability and Stability Plan as a quasi-bailout for consumers, but that doesn’t mean everyone gets a piece – you still have to qualify.
Regardless of which types of loan programs you may be eligible for, it’s important to know what not to do before beginning the process of applying for a mortgage. In order to significantly increase your chances of qualifying for a lower interest rate and more favorable loan terms, you’ll want to avoid making the following 5 most common blunders:
1. Taking it to the limit
Having a lot of debt increases your debt to income ratio. This is a key factor that lenders use to determine how much debt you can comfortably manage. Before you apply for a home loan, make sure that your credit card balances are low. Refrain from using your credit cards to make purchases if you need to acquire a home loan. If your credit card balances are already high, start paying down the balances and keep them low.
2. Financing major purchases before applying for a home loan
A lot of families run into trouble with this one, but to make your credit score look better for your mortgage, you should wait until after your loan closes to finance that car. Be aware that sometimes a lender will pull your credit once more after you’ve been ‘approved,’ so wait until the loan actually closes before taking that step for a new car.
3. Waiting until the last minute to obtain financing
I know it’s not something to look forward to, but you should start getting ready for a refinance at least a year in advance of when your ARM (adjustable rate mortgage) adjusts. Some people will wait until crunch time – 2-3 months out – before even talking to their bank. This really reduces the number of options you’ll have.
4. Paying off old collections and charge offs
If you’ve had bad debt in your past, it would seem like a responsible idea to clean it off your record before applying for a big purchase. In actuality, this hurts your credit score because it looks like that debt is much more recent in your credit history. Avoid paying these off until after your mortgage closes, or pay them off at least a year in advance of applying for a home loan.
5. Signing up for credit help
Lenders see ‘credit counseling’ as a red flag. To them, it means someone who doesn’t know how to manage their own finances, even if you learned from the counseling and are on the right track now. Credit counselors will usually have good advice for getting out of debt, but the actions they recommend won’t reflect as nicely on your credit score. Typically, closing healthy credit accounts is a top recommendation – which is great for limiting your debt – but looks fishy on your credit report.
If you are considering signing up for credit counseling, it may be in your best interest to just cut up or hide (somewhere without easy access) your credit cards, keep your accounts open, and pay down the balances using self control.
Now that you know the 5 most common credit blunders, put into action what you’ve learned and get qualified for a great home mortgage!