Getting your credit ready for buying a home can make the difference between qualifying for a mortgage or not. It plays a big role and is something that lenders will look at when deciding how much of a credit risk you may be. This, in turn, determines the amount you get approved for and the interest rate you are given. This is why we advise homebuyers to start getting their credit ready several months before buying a home. Our Folsom mortgage lender team is here to show you how.
Step One – Your Credit Report
The first thing you need to do is get your credit report so that you can review it. This will show you where your weak points are, whether there are errors that need to be corrected, and what accounts you have that are active. If you have errors, such as an account that isn’t yours or an account that should be listed as closed, you will need to contact the credit bureau to have these corrected.
If your credit is less than good, you have the chance to clean things up. For example, if you have a few credit cards that have a high-interest rate, it would benefit you to pay these off or down. It will save you money on interest and can boost your credit score.
Our Folsom mortgage lender team can let you know what your credit is and where it should be.
Step Two – Tradelines
Tradeline refers to the different types of credit that you can have, such as unsecured loans, store cards, and credit cards. Lenders like to see that you have a good balance between these three and that they have been open for at least 1 to 2 years. If you don’t have a good balance of tradelines, you can fix that by opening an account for the area that you are lacking, like a store card of low limit. This is something you will need to do about 6 months in advance of buying a home. You will also want to be careful to not miss any payments and to keep your overall credit utilization under 30% of your total credit limit.
If you have any old tradeline accounts that you haven’t really used, don’t close these out because they can help keep things in balance.
Step Three – Don’t Open New Credit Lines
This seems to contradict what we just said about tradelines, however, we aren’t talking about store cards. What you want to avoid is opening a new loan or line of credit less than 6 months before you apply for a mortgage. Any new line of credit that you take out will lower your credit score temporarily, and this can have an impact on whether you get approved for a mortgage. It’s also important that you not open any new lines of credit during the mortgage process until after closing.
Step Four – No Major Purchases
Like lines of credit, it’s not a good idea to make major purchases during the application process. You may get approved for a certain amount at the start of the mortgage process, only to be rejected at closing because something changed in your credit report, such as making a big purchase on new furniture. Hold off any making new purchases until after closing.
Another thing to avoid is making major purchases when going through the application process. I
Step Five – Don’t Move Large Amounts of Money Around
If you have to move money around, try to do this at least 3 to 6 months before you begin the mortgage process. Lenders will want to see at least 3 months of bank statements and having large transfers of money moved around, closed accounts, and large sums of cash that haven’t come from your own bank account can raise a red flag. It will also require you to have more paperwork that shows where the money came from. For example, if you suddenly have $20,000 deposited into your bank account from a family member gifting you the funds for a downpayment, you will need to have a letter that proves the funds are not a loan that needs to be paid back.
Getting credit ready can take a bit of time and is something you should start doing well before you begin the mortgage process. It gives you a chance to raise your credit score and clean up your report, giving you the best chance possible for being approved for a mortgage. If you have questions about getting your credit cleaned up, give our Folsom mortgage lender team a call today!