A home is a major financial investment. By rushing to get a mortgage or taking on the responsibilities of being a homeowner too soon, your credit score could be affected in the process. Even if you have found your dream home, it is important to take your time when assessing your finances to make this purchase. This all starts with having a good credit score.
By having a high score, you will have a better chance of getting the type of loan you need for your house and interest rate. Improving your credit score can be one of the hardest parts of getting ready to apply for a mortgage, but here are some things to keep in mind while doing it:
Don't apply for new credit
As you are searching for mortgage options, you should avoid applying for any new lines of credit. It may seem like a good idea to open new accounts to pay for your mortgage, but you will be doing more harm than good. Not only will opening new accounts sink your further into debt, but you could risk your credit score being negatively affected due to hard inquiries. The best bet is to take care of your current debts and make sure you can afford a mortgage.
Stay away from major purchases
Along with foregoing new lines of credit, you should stay away from any major purchases. Buying a new car or a giant TV to adorn your home may seem like a good idea, but you should avoid taking on any new debts of this magnitude, as it will be counterproductive to lowering your balances.
Avoid closing accounts
Paying off an account or whittling one down before you meet with a lender can be a great feeling. This can help you clear up your budget to help you make your mortgage payments, but you should avoid closing these accounts. It may seem natural to close accounts once you have paid them off, but this will result in you raising your credit utilization ratio. You will be throwing away all of the good credit you worked so hard for by closing accounts, which is something lenders hold in high regard when issuing you a new loan.
Remember to make timely payments
With looking at homes and meeting lenders, you may have a lot on your plate. This can be a stressful process, but you shouldn't get distracted and forget to pay your credit card bills. Lenders will want to see that they can trust you with an expensive loan, and they can gauge that by tracking your payment history. If you have missed one payment, you will incur a late charge and see your credit score drop down a few points. If you feel that you will have trouble making these payments, try setting up a reminder on your phone.
Avoid using all your savings
Minimizing your debt is beneficial if you are looking to take on a mortgage, but you should be careful with how you pay for it. One of the most common mistakes homeowners make when trying to pay off their debts is using their savings. When finding your dream house and applying for a mortgage, you should be aware that there are additional charges. Closing costs, appraisal fees and even charges from lawyers are just some common extra fees you will see during the homebuying process. These extra expenses, along with your mortgage, will be difficult to pay for if you have depleted your savings in order to whittle down your credit card debt. By not having enough money in your accounts, you could have trouble making your house payments, which could ultimately lead to your credit score being affected. To avoid this, create a payment plan that does not involve your savings. Take a look at your budget and see where you can cut costs in order for you to pay off your debts quicker.
Hold down a job
Stability is an important factor for lenders. These financial experts do not want to issue an expensive loan only to find out that you either leave town unexpectedly or default on it after shortly receiving it. One way they will assess your dependability is by looking at your current job situation. After seeing that you have held down the same job for a good amount of time, they will be more inclined to do business with you. But you should avoid applying or taking on a new job during the application process. Lenders will need to see pay stubs and other proof of employment before issuing you a mortgage. If you are in the process of changing jobs, lenders will have a difficult time assessing your situation and may even access more hard inquiries to get information about you.