You have made the decision to purchase your own home…Congratulations! Undoubtedly, you did not make this huge step lightly. But on top of deciding how you want to furnish and decorate your new home, there are many things you need to be careful of before you apply for a mortgage, and also to avoid between the time you receive your preapproval until when you actually sign papers at the closing.
You need to be mindful of your credit score and any activity that could potentially show up on your credit report. Even if you have already been preapproved, your credit score and report will continue to be monitored carefully through the entire buying process by your lender. Any changes could increase your rate or even ruin your chances of actually closing the deal. So what do you specifically need to avoid during this time? Below we walk through the most import things to be mindful of.
Know Your Financial Health. Be sure you work on your credit score and focus on repairing your credit at least six months prior to applying for your mortgage.
Do not apply for new credit. This means no new auto loans, no store lines of credit, and no new credit cards. When you apply for new credit, your credit score will be affected which could significantly increase the rate in which you are offered for your home loan.
Not only should you not apply for new credit, but you should not close any accounts either. Along with payment history, another element of your credit score is length of credit history.
Avoid cash deposits into your bank accounts. Lenders need to be able to trace all transactions made in and out of your accounts. If you do plan on making a cash deposit, speak to your lender first and determine how the deposit needs to be documented.
Do not make any large purchases. No matter how badly you want new furniture or might need a new car, the debt that comes along with it will affect your debt to income ratio, which will in turn show up on your lender’s radar.
Just as it is not recommended that you make any large purchases, avoid co-signing anyone else’s loan. While you might trust the other person to make the payments, lenders do not. They are looking at the bottom line, which is the fact that if the person does not make the payments, you are ultimately responsible for the loan, again affecting your debt to income ratio.
Keep status quo -- do not change bank accounts. If you decide to change banks, there is a chance your dream of purchasing your own home will be delayed. Lenders need to trace all banking transactions for a minimum of 2 to 3 months, sometimes longer, depending on the lender. If you need to make a change to your accounts for any reason, be sure to discuss it with you lender first.
Pay your bills on time. As briefly mentioned above, your payment history has an impact on your credit scores. A strong payment history is crucial in keeping your rates low.
While it might sound odd, do not pay on any old collection accounts. Creditors are not able to continue to try to collect on an account that is older than 7-10 years. Many people believe that if they are going to try to be preapproved for a house, they must attempt to clear up old debt. What they do not realize is debt this old is considered “dead”. Once a payment is reported, the account is revived and will show up on current credit reports.
While you might think that any one of these scenarios might be minor, it is important to understand the impact each can have on your overall financial health. Before making any changes involving accounts, payments or credit, be sure to reach out to a trusted lender for advice.
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