How Can You Maintain Credit Health During the Mortgage Application Process?
Navigating the mortgage application process can be complex, especially when it comes to preserving credit health. We've gathered insights from seasoned mortgage professionals, including brokers and CEOs, to provide you with their best advice. From the importance of reviewing credit reports early to the wisdom of refraining from new credit applications, explore the top four strategies to keep your credit in top shape during this critical time.
- Review Credit Reports Early
- Avoid New Credit During Funding
- Keep Credit Utilization Below 30%
- Refrain from New Credit Applications
Review Credit Reports Early
Applying for a mortgage is an important step toward homeownership, but it can also put your credit under the microscope. To ensure a smooth process and secure favorable loan terms, here are some key tips for maintaining your credit health during the mortgage application process:
Review Your Credit Report Early: Before starting your mortgage application, check your credit reports from Equifax and TransUnion. Look for any errors or outdated information and dispute inaccuracies to ensure your credit report is accurate.
Avoid Opening New Credit Accounts: Refrain from opening new credit accounts or applying for new loans while your mortgage application is in progress. New credit inquiries can lower your credit score and may be viewed as a risk by lenders.
Keep Credit Utilization Low: Aim to keep your credit utilization ratio—how much of your credit limits you're using—below 30%. Pay down existing balances and avoid accumulating new debt during the application process.
Make Timely Payments: Ensure all your payments—credit cards, loans, and bills—are made on time. Late payments can damage your credit score and impact your mortgage application negatively.
Keep Old Credit Accounts Open: The length of your credit history affects your score. Keep older credit accounts open, even if not in use, to maintain a longer credit history and a healthier credit score.
Avoid Major Financial Changes: Try to avoid significant financial changes, such as changing jobs or making large purchases, during the mortgage application process. Stability in your finances can prevent complications and delays.
Communicate with Your Mortgage Broker: If you anticipate any changes to your financial situation or have concerns about your credit, communicate with your broker. They can provide guidance and help address potential issues before they become problems.
By following these tips, you can help ensure your credit health remains strong and your mortgage application process goes smoothly. A healthy credit score not only enhances your chances of approval but also helps secure better loan terms and lower interest rates.
Avoid New Credit During Funding
Borrowers must be highly aware of maintaining their credit health during the mortgage application and funding process. A lender has the right to pull a borrower's credit prior to funding, even if the mortgage was approved and instructed. The mortgage is truly only fully complete once the lawyer has the funds in their trust account to close the deal.
To prevent last-minute surprises, borrowers should not seek additional credit by applying for car loans, furniture loans, credit cards, etc. These would be additional debts that could put the debt servicing over the allowed limit or lower their credit score below the allowed level, and then a lender could withdraw their funding. Paying debts on time and managing debt levels is always the best practice for maintaining your credit score.
Keep Credit Utilization Below 30%
How can you maintain mortgage health during the mortgage process? A consumer can really increase their credit scores by following a few rules. First, try to keep your credit card usage to less than 30% of the available credit. You can achieve this in two ways.
Let me show you an example: if your limit on your credit card is $4,000 and your balance is $2,000, then you can get to 30% usage in two ways. You can pay down the balance to 30% of your current limit, or $1,200, OR you can contact your credit card company and ask them to increase your credit card limit from $4,000 to $7,000, thereby leaving your balance of $2,000 at under 30% of the new limit. (*Note: Your credit card company will disclose to you if there is a hard pull on your credit to increase the limit. Do NOT increase your limit if a 'hard credit pull' is requested. Only a 'no credit pull' or a 'soft pull' that will not impact your score should be considered.)
Make sure you go to one of your credit card apps and review your credit report, OR go to the Free Credit Report website and review your credit to ensure there are no errors on the report. (*Note: The balances on the report may be 60-90 days old. The balances are not updated in real time.)
Also, do not apply for new credit, and pay all your current obligations on time. Cheers to you for maintaining mortgage health when financing a home!
Refrain from New Credit Applications
We advise paying off any derogatory accounts, but especially recommend not applying for any new credit during the application and underwriting process. Depending on the loan purpose, we may also explore debt consolidation.
