Photo (cc) by dbnunley
This could be a great time buy or refinance a home — if your credit is in shape.
Interest rates are still low and lenders are easing restrictions on borrowing, which makes now the time to act.
But if your credit isn’t stellar, you may find that dream home out of reach. To avoid such disappointment, be sure to steer clear of these five credit mistakes:
1. Having late payments or collection accounts
Once 30 to 60 days have passed, a late payment will be reported to the credit bureaus and remain on your credit report for seven years, as we explain in “Will 1 Late Payment Wreck My Credit Score?”
That’s especially bad considering your payment history accounts for 35 percent of your credit score, according to myFICO.
2. Applying for new credit
Simply applying for credit can knock a few points off your credit score, the National Association of Realtors says. Plus, if you’re approved for the new credit, a lender might worry that you will start spending more, increasing your risk of default.
If you’ll be applying for a home loan soon, avoid applying for anything else.
3. Having high credit card balances
Mortgage companies typically do not look favorably on potential borrowers who keep high credit card balances. Eric Khan, a senior mortgage banker at Total Mortgage, writes:
Unfortunately, making minimum credit card payments might not be enough to qualify for a mortgage loan. The lender looks at your entire credit history, and if you have maxed out credit cards, this raises your debt-to-income ratio and impacts whether you’re able to qualify for a mortgage, or how much you receive from a bank.
4. Disputing too many credit-report items
Correcting errors on a credit report can improve your score. But lenders could become concerned if you routinely dispute multiple accounts, as they might take that as a sign you’re trying to game your score.
Resolve any errors long before applying for a mortgage. Start by checking out “Should You Repair Your Own Credit?”
5. Failing to build up a credit history
As we explain in “7 Ways to Build Your Credit Score Without a Credit Card“:
Whether you’re buying a home, car or big-ticket luxury item, the first thing most lenders typically look at is your credit score.
If you have limited or no credit history, you’ll need to begin building your credit and boost your score before you apply for a major loan.
Has a credit-related issue ever prevented you from getting a mortgage? Tell us about it in our Forums. It’s a place where you can swap questions and answers on money-related matters, life hacks and ingenious ways to save.