Credit history is an important factor when applying for a mortgage loan. Your FICO® score (a measure of consumer credit risk) plays an important role in your mortgage’s loan terms.
Your goal is to have a high FICO® score (700+) to achieve a lower interest rate loan. The higher your score, the lower your rate will be. (Note: People do qualify for mortgage loans with lower scores.) If your score is not in a higher range, you can work on boosting it higher by responsibly managing your credit over time.
Here are seven things to avoid before applying for a mortgage loan to keep your FICO® score up:
1) Not Checking Your Credit
Mistakes can occur on credit history that can affect a FICO® score. It is important to check your credit report to ensure it is accurate. There are three major U.S. credit bureaus to check: Equifax, Experian and TransUnion. If you do find mistakes, you can dispute any errors and get them fixed. Be sure to check first with your loan officer before disputing items as this can sometimes have a negative affect on your credit.
2) Applying for Credit
When you apply for credit there will be an inquiry on your credit report. This new credit application can cause a small dip in a FICO® score. If you have a “hard” inquiry – meaning you have applied for credit or a loan, the issuer of that credit or loan will pull a report (that you have authorized) on your credit history. If your score is on the edge, this could cause you to then qualify for a mortgage loan at a higher interest rate. (Inquiries will remain on your report for two years, but FICO® scores only count for the past 12 months.)
3) Overusing Current Credit Cards
Mortgage lenders look at debt-to-income ratios and this will include outstanding credit card balances. If you have a large monthly credit card balance, you might not receive the lower mortgage interest rate. The good news is that over-using your credit cards does not have a long-term impact on your FICO® score.
4) Falling Behind on Payments
Late payments will lower your credit score. Always be current on all of your accounts.
5) Consolidating Credit
If you move outstanding credit balances, your new credit card could appear to have too high of a ratio of debt. Your goal is to keep the balance on all credit cards as low as possible.
6) Making Large Cash Purchases
Part of your loan approval will be verification of cash in the bank. If you use this cash for a large purchase, it will lower your reserves and impact your score and loan approval.
7) Making Large Deposits
All deposits need to be documented and accounted for. If you have to make a large deposit for any reason, be aware that you will need to explain where the money came from.
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