Are you looking to buy a home? Your credit score is essential to be qualified for a mortgage. So it’s vital to have excellent credit habits to make sure you maintain a top credit score.
You can avoid credit problems if you remember the common mistakes we highlight here.
Buying On Credit During Mortgage Approval
The most important step of the home buying process is being pre-approved for a mortgage. Before seeing any homes, you should get qualified by a mortgage company to see how much home you can afford.
The mortgage company will review your income, debts, credit utilization, and credit score and tell you how much home you can buy.
But even if you’re approved for a mortgage, you aren’t in the clear yet. The loan provider will rerun your credit before the mortgage closes. So if you buy more items on credit before it closes, you could boost your credit utilization. And that can damage your score.
Many examples of home buyers damaged their credit during the pre-approval process. And that led to the deal falling through. Don’t let this happen!
Accepting Bad Mortgage Loan Terms
If you have bad credit, you probably should wait to buy a home until you boost your score. While you can often purchase a home with bad credit, you will either pay a higher interest rate or have to buy expensive mortgage insurance.
Sure, you will need to wait a bit longer to move into your dream home. But you’ll have better mortgage terms and pay less interest every month.
Not Disputing Negative Credit Report Items
It’s important to check your credit report several months before applying for a mortgage. If you see a black mark that doesn’t make sense, dispute it with the credit provider. Sometimes, they make mistakes, such as reporting a payment 30 days late when you paid on time.
Not Checking Your Credit Score
Many people contact a real estate agent first. After all, looking at homes and talking to a trained real estate agent about properties is fun and exciting.
But the first step to finding a new home should be keeping on top of your credit score. Monitoring your score is a great way to track your progress. It also helps avoid issues and fix them before your score takes a significant hit.
Anyone can check their credit score as much as they like. Usually, consumers can check their credit score for free once a year at AnnualCreditReport.com. You also can see your credit score through some lenders and credit card companies as you use their services.
It’s smart to review your credit report at least a year before you consider applying for a mortgage. That way, you have a lot of time to correct any errors or problems.
Failing To Pay Bills Promptly
Payment history is a critical part of one’s credit score. So if you are 30 days late on that car payment, watch out: It will be on your credit report for seven years!
However, if you’re a few days late on a credit card or car payment, it isn’t reported late to the credit agencies. You will be charged a late fee, but at least it doesn’t ding your credit.
Most of us have many bills to pay every month, so missing a payment can happen. But you can avoid this issue by setting payment reminders on your phone’s Google calendar.
Set each payment reminder at least a day or two before it’s due. That way, you’ll maintain a great payment history and qualify for a low-interest rate on your mortgage.
Making Minimum Credit Card Payments
Your goal should be always to pay off your credit card in full every month. The higher your balance is every month, the bigger the interest charges. For instance, if you have a $5,000 credit card debt at 20% interest, that’s $1,000 per year or about $85 per month in interest. You could use that $85 to save for a down payment.
Also, having high credit card balances damages your credit score. Experian, Equifax, and Transunion look closely at your credit utilization ratio when determining your score.
If your credit cards are maxed out, the credit agencies view this as more financially irresponsible. You’re also more likely to default. So, it’s best for your score if your credit utilization is 25% or lower.
But always strive to pay off those cards for the best FICO score.
Not Using Cash
Credit cards are helpful and an excellent financial tool. But when used irresponsibly, they make you unaware of how much you are spending. As a result, it’s easy to run up thousands of dollars in credit card bills when you pay everything with credit cards.
If you do that, you could find yourself with a significant credit score problem that affects your ability to buy a home.
To avoid credit issues, consider using cash for your day-to-day purchases. For example, every month, put cash in several envelopes for groceries, going out to dinner, etc. Then, when there’s no more money in the envelope, don’t spend on that item anymore for the month.
Buying a home is exciting, but you should take care of your credit months and years before applying for a loan. Using the tips above will ensure that your credit score will stay in tip-top shape.