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Prepare Your Credit for Getting a Mortgage

If you’re thinking about buying a house or refinancing an existing mortgage, you probably know the importance of paying your bills on time to maintain good credit. But even when you have every intention of being responsible with credit, some situations can throw you off course and damage your score.

For this reason, you must be proactive and take steps to protect yourself from running into credit issues.

1. Check your credit report

If you always pay your bills and you don’t carry a lot of credit card debt, you might assume that you have an excellent credit score. But sometimes, our credit scores aren’t as high as we think.

If you never check your credit, you might not become aware of negative items on your reports. Some credit reporting mistakes can decrease your personal score, and depending on the severity of the damage, errors might result in a mortgage rejection.

As a rule of thumb, check your credit at least once a year and examine your reports carefully for mistakes.

You can get free copies of your credit reports once a year from AnnualCreditReport.com, or you can contact each of the three credit reporting bureaus (Experian, Equifax, TransUnion) to request your report.

2. Protect yourself from identity theft

Credit damage due to identity theft can also put the brakes on your dreams of homeownership, so take steps to protect yourself.

Keeping a close eye on your credit reports, as previously mentioned, is one way to protect yourself. In addition, sign up for credit monitoring. Once signed up, you’ll receive an alert if anyone attempts to open a credit account using your name and Social Security number.

You can also protect yourself by never sharing your personal information (name, social security number, bank and/or credit account numbers, etc.) Also, monitor your bank and credit card statements on a regular basis and report fraudulent activity.

3. Say "no" to cosigning 

Cosigning a loan can help another person qualify for credit. Just know that as a cosigner this debt will appear on your credit report, and it counts toward your debt-to-income ratio.

This might seem unfair, considering that you’re not the primary account holder. However, you agreed to share this debt with the other person. If they can’t repay it, you become responsible for the loan.

The bottom line is that cosigning can potentially reduce your purchasing power, making it harder to qualify for a certain mortgage amount.

You’ll also run into credit problems if the primary account holder defaults on the loan and payments become more than 30 days past due. A late payment could appear on your credit report, reducing your credit score and hurting your ability to get a better mortgage rate.

The best way to protect yourself is to avoid cosigning a loan for anyone, especially if you’re thinking about getting a mortgage in the near future. If you’ve already cosigned a loan, speak with the primary account holder to see if they’re in a position to refinance the debt and remove your name from the loan.

4. Don’t apply for too much new credit

Having a mixture of credit strengthens your personal score because it shows a history of managing different types of credit. But while it is wise to have more than one type of credit, make sure you spread out credit applications and don’t apply for too many new accounts in a short span of time.

Every credit inquiry or application can decrease your credit score by a few points. Let’s say you apply for five credit accounts within a month. If each inquiry reduced your credit score by two points, you could potentially shave 10 points off your credit score.

Losing 10 points isn’t a deal breaker if you have an 830 credit score. But if you started off with a much lower credit score, a credit score drop of 10 or 15 points could potentially make you ineligible for a certain mortgage program or trigger a higher mortgage rate.

The Takeaway

Credit plays a big role when getting a mortgage. If you need advice or have questions about credit requirements, the loan experts at Cherry Creek Mortgage are available to assist. 

Call today to learn about our affordable lending solutions, which includes mortgage programs tailored to borrowers with lower credit scores.