Get your credit in shape before shopping for a home
By Allie Johnson
January 25, 2016
You can avoid credit surprises and hassles on the road to home ownership by getting your credit in order well before you apply for a mortgage.
Making the mistake of waiting until the last minute to address credit issues could mean getting denied a mortgage, paying higher interest or even missing out on a house, says Cara Pierce, a housing financial specialist with Clearpoint Credit Counseling Solutions.
“If there's something wrong with your credit, that house you want may not even be on the market two or three months from now,” Pierce says.
To make sure your house purchase doesn't get derailed by credit problems, here are 10 steps to take long before you start house hunting:
1. Check your credit reports. At least six months to a year before you want to start looking at homes to buy, pull your credit from all three major credit bureaus for free at AnnualCreditReport.com. Check your credit reports for any errors or negative marks that could be dragging down your credit scores. Even if an error isn't hurting your score, get it fixed, Pierce says. For example, a car loan paid as agreed for Sam Smith Junior's BMW showing up on Sam Smith Senior's credit report could make it appear as if the father has more debt than he actually does, affecting his ability to get a mortgage, Pierce says.
2. Know the score. The free credit reports won't include your credit score, though, and it's smart to know where you stand. You can purchase your FICO scores from each of the big three credit bureaus (Experian, Equifax and TransUnion) at myFICO.com for about $20 each. Some credit cards offer free credit scores, too. Don't just pull one score, either, as each credit bureau typically generates a different score. If your score is in the mid-700s or higher, you can move forward with confidence on your mortgage loan approval process. “You'll be able to shop around and get just about any deal you want,” Pierce says. If your score is in the 600s, even the high 600s, you should be able to get a loan, but you won't get as low an interest rate as you would if you had a higher score, Pierce says. And if it's in the 500s? “You may have difficulty even getting a loan,” she says.
If there's something wrong with your credit, that house you want may not even be on the market two or three months from now.”
— Cara Pierce,
a housing financial specialist
with Clearpoint Credit
3. Clean up credit blemishes. If late payments, missed payments or erroneous information are dragging down your score, you can take steps to straighten things out. It may be possible to get errors deleted from your credit reports. It's best to try to clean up your credit yourself rather than resort to hiring a credit repair company, Pierce says. With a little education, time and patience, you can save yourself paying for services that often over-promise and under-deliver. It's critical to be aware that legitimate but negative marks on your credit report can't be erased, but their effect can be lessened by good credit behavior over time.
4. Check your credit mix. Is your credit file a little thin? Most mortgage lenders want to see a good credit mix, or at least three open accounts including a credit card or two, an installment account, such as a student, personal or car loan, Pierce says. If your credit score is too low to qualify you for a regular, unsecured credit card, apply for a secured card, which is tied to a bank account. If an installment loan would round out your credit mix, talk to your local bank or credit union about taking out a small personal loan.
5. Use your cards. Don't let your credit cards sit unused, says Rondi Lambeth, host of the “Your Credit Matters” radio show. Lenders want to see that you are responsibly managing credit lines by charging regularly, using only a small portion of your available credit and paying off balances every month.
6. Apply for new credit sparingly. Unless you need to open a new account or two to build your credit profile, avoid opening new credit cards or taking out other loans months before applying for a mortgage. Applying for too much new credit at once can make your score go down, according to the Consumer Financial Protection Bureau. And new lines of credit appearing on your credit reports can make you look like a high-risk borrower to a mortgage lender.
7. Pay down debts. If you're carrying hefty balances on any credit cards, work on paying down those balances. Having a high credit utilization ratio — the amount of your available credit you're using — hurts your score. You want to keep your credit use to no more than 30 percent of your available credit. For example, never carry more than a $300 balance on a card with a $1,000 credit limit. And even if you've got great credit, a high debt-to-income ratio can affect your ability to get a mortgage, Pierce says. The bank might say, “We don't feel you're a good bet right now to take on more debt,” she says.
You need to figure out how much you can comfortably pay because a bank may approve you for more home than you can really afford. Doing your own numbers is critical.”
— Denise Winston,
author of “It's Your Money
– Avoid Costly Mistakes”
8. Don't make a career change. Don't forget that, in addition to looking at your credit history and score, lenders also will check your employment and income. Most lenders want to see some stability, and that means at least two years in the same field, Pierce says. If you're a teacher, for example, and you get a similar job in a different school district, that's OK, she says. But if you're a teacher who dreams of becoming a fashion designer, you might hold off on making that switch.
9. Decide how much home you can afford. Look at your budget to figure out what monthly mortgage payment would work without overextending you financially, says Denise Winston, a financial expert and author of “It's Your Money – Avoid Costly Mistakes.” “You need to figure out how much you can comfortably pay because a bank may approve you for more home than you can really afford. Doing your own numbers is critical,” she says.
10. Get preapproved before you shop. It pays to visit with mortgage lenders to figure out not only how much of a home loan you qualify for, but also get preapproved, which gives you an edge over other buyers who have yet to go through the loan qualification process. Shop around and talk with several different lenders to give yourself options and get the best terms, Pierce recommends. Being preapproved allows you to figure out your price range and look only at houses you can afford, she says.
Making sure you've got good credit well before you plan to buy a home can save you lots of money, Pierce says. For example, just a quarter point lower interest rate could easily save some homebuyers $10,000 or more over the life of a 30-year loan, she says. Even if you keep the loan for a shorter time, then refinance, you might still save thousands.
If your score is too low to get the best interest rates, you'll need time to dispute any errors, pay down debt and take other moves to improve your score, Pierce says.
“It's going to take time to get your credit where you want it,” she says. “There isn't any magic pill.”