When you finally locate the home of your dreams, realtors will often ask if you’ve been prequalified for a mortgage. Prequalification involves filling out a credit application, and along with submitting your income information, determining how much home you can afford as dictated by the underwriting process. A large component of getting approved is having acceptable credit scores.
If you’re one of thousands applying for home loans daily, prepping your credit and understanding what the three main credit bureaus are reporting is monumental in proving you’re responsible when it comes to paying other unsecured debts. Home loans are considered secured as the title is held by the bank until the home is paid for fully, which often takes between 15 and 30 years.
Here’s how to prep your credit for your first mortgage:
Get copy of tri-merge report
Mortgage companies pull all three bureaus, but often will not share the information contained with applicants. So, it makes sense to get a copy of all three Bureau reports before applying so you have a complete credit picture before the underwriter does.
Companies offer three Bureau reports between $20 and $40, a wise investment for individuals who may not know what their credit file looks like. Scores are often included free of charge.
Look for inconsistencies
As you’ve read online, credit reporting agencies are only obligated to report what information is given. So ultimately any errors that are found must be disputed with whomever furnished the data. Print out a copy of your credit report and, with a pen, note any errors in data being reported by companies who you’ve opened accounts with.
Although TransUnion, Equifax and Experian offer online disputing, it’s vital you submit disputes by first-class certified mail, return receipt requested. Whereas online disputes get passed to an offshore computer, receive a code, sent to the data furnisher and investigated, many believe this process doesn’t work, or works unnecessarily slow.
Submitting disputes by mail ensures someone will read them, respond within 30 days as required by law, and not treat your dispute like a number.
Pay bills – even to collection agencies
If your credit report lists bills that are owed within the last 1 to 5 years, pay them off and either ask for removal, or simply have the item updated as “paid collection”. The fact you made the effort shows a mortgage underwriter responsibility, tipping the approval odds back in your favor. Even if the collection agency isn’t willing to remove or update items listed, pay them and maintain records that you’ve done so successfully.
If you have any items listed as being 30-90 days late, you can write a goodwill letter to the creditor and request they remove that notation, provided you haven’t been consistently late since account opening.
Conflicting stories online will suggest fighting tooth and nail to remove legitimate collection accounts, however just know it’s illegal to remove an account because you don’t like it – proof must be presented that you’re under no obligation to pay the account, or the account is genuinely not yours. Besides, the longer you fiddle around with your credit report and arguing baseless assumptions, the longer it will take to get the underwriting process completed – which means your dream home could be sold to a cash buyer if didn’t put down earnest money.
Establish credit responsibly
Mortgage officers like to see a diverse selection of credit before approving home loans. Paying these credit accounts over a period of one to two years shows you’re responsible when extended unsecured credit, and can handle multiple obligations at once.
Open 1 to 2 credit card accounts, a local store account, make sure you have secured at least one personal loan (even if small), and it certainly couldn’t hurt to have an auto loan either paid off or current. Student loans, provided they are either rehabilitated or being paid successfully, are another added incentive for mortgage underwriting purposes.
Remember, never use more credit than you’re able to pay back. General rule of thumb is never charge what you can’t pay for in cash.
Finally, don’t go on credit applications sprees before applying for a mortgage. Underwriters who see an abnormal number of credit inquiries feel the consumer is desperate, which elevates borrower risk.
Once you’ve ordered your three-bureau report, have corrected errors and are consistently using credit in a responsible manner, it’s a good idea to monitor ongoing progress. This can easily be done using Credit Karma, myFico or similar products that offer a monthly monitoring service for either free or a nominal fee.
One small error could cost you unneeded interest rate hikes. Stay abreast of credit, folks, and monitor the files being used against you.
Keep your credit in tiptop shape by paying bills responsibly and not asking for more credit than you need, and the underwriting process will go smoothly provided you have all the information requested in good order.