So you have good credit and you've applied for a mortgage – congratulations!
Did you know that lenders are now required to check borrowers' credit twice during the loan application process - once during pre-approval and once just prior to closing? This second check can really trip up your mortgage application because changes to your credit score could mean your application might be denied!
Fear not – here are some quick tips to help you protect your credit score:
- Make Your Payments on Time. Always pay off your credit card obligations on time. Late payments wreak havoc on credit scores. And, once severely damaged, it can take a long time to repair your credit profile. Most importantly, do not miss any card payments during your loan application. Even if you were previously pre-approved for a mortgage, one missed payment could bring your application process to a sudden halt or abrupt end.
- Keep the Job You Have. Do not change or quit your current job (unless you will be making more money). Lenders want to see that you have stability. They want to see a steady or increasing income that will enable you to pay your mortgage. So, before entering that new position, check with your lender to discuss the possible impact of changing jobs during your application process.
- Stay with One Bank. Stick with your current bank for your day to day banking needs. Just as with your employment history, lenders want to see stability. Plus, moving money around will only make it more difficult to track your fund and credit histories, extending your loan application period.
- Stick with Your Current Credit Cards. Even if you are approved for a new credit card, any unused lines of credit will be seen as a risk to your lender (technically they view them as unsecured loans). Therefore, don't apply for any type of credit card 3-6 months prior to and during the loan application process. And look out for those seemingly harmless offers at your favorite store that say "save 15% today by applying." Even these cards count against you!
- Buy that New Car After You're in Your New Home. You should also resist the urge to buy a new car during your loan application process. Do not take on any new debt! Applying for a car loan will instantly be flagged to your mortgage lender because the dealer will have to file an inquiry report on your credit. Unnecessary inquiries will only lower your overall credit score, which may result in higher interest rates or worse yet, disqualify you from obtaining a mortgage.
- Wait to Buy Furniture. Don't buy furniture on credit before buying your house. Similarly to financing a new car, charging big-ticket items will increase your debt and could harm your credit score. Remember, even if your loan was previously approved, the lender will check your credit profile just before closing. So, hold off on that new couch and flat screen TV until you have closed on your new home.
- Avoid Co-Signing Any Loans. Avoid co-singing loans when applying for a mortgage. Even if you are not responsible for making payments on that loan, the bank will still view the loan as yours.
- Keep All of Your Current Credit Cards. This one seems backwards. It's complicated, but when you close an account, you are reducing your line of available credit. As a result, you will be raising your debt to credit limit ratio. For example, if you have overall credit card limits of $10,000 and balances of $2,000, your ratio will be 20%. But, if you decided to close a line of credit with a limit of $6,000, your ratio will be raised up to 50%. Consequently, your ability to pay back a loan will appear less likely, causing the bank to view you as a risky investment and possibly retract your loan application.
- Maintain Low Credit Card Balances. Avoid maxing out or overcharging your credit cards while applying for a mortgage. Going over your credit limit is will hurt your credit score almost as much as missing payments. Lenders will immediately flag it, and may halt the loan application process for further review of your credit history. Remember, showcasing a history of responsible money management is the key to securing your mortgage.
- Find One Lender – And Stick With Them. Applying to multiple lenders at the same time can not only hurt your credit score, but is also illegal. Plus, as each bank performs inquiries on your credit profile, your score will drop. Therefore, choose a broker who has the ability to match your application up with any available lender. This will allow you to avoid shopping around for a broker and ruining your credit score for a mortgage.