Smart Credit: Don’t Wreck Your Chances Of Getting A Mortgage

Over the last decade, credit has tightened considerably. In the past, people could walk into a bank, state how much they earned and secure a mortgage. These days, underwriting a mortgage commonly takes a month or more. Blemishes on your credit follow you for years. Because interest rates are extremely low, keeping your credit clean has never been more important.

If you are interested in buying a home, your FICO or Fair Isaac Corporation score will determine if you are eligible and the mortgage rate you will pay. FICO scores range from 350-850. The best interest rates go to those with a score of 720 or higher.

Credit History Basics

Your credit history makes up 35 percent of your score. In essence, your credit history is your track record of paying bills on time. Paying your bills a few days late can hurt you in the long run. Making one late payment can reduce your credit score by up to 110 points.

Available credit comprises 30 percent of your score. Creditors want to see that you spend no more than 20 percent of your available credit. Less than 10 percent is even better. If you have $20,000 available in credit, be sure that you are carrying a balance of $4,000 or less.

You should occasionally use old credit cards. Just be sure you can pay off the balance each month without accruing interest. Fifteen percent of your score comes from your history in using and paying credit cards on time.

Preparing Your Credit for a Mortgage

When you are interested in getting a loan, it is best not to take out new forms of credit. Inquiries into your credit history make up 10 percent of your FICO score. Avoid applying for new credit cards until after you have secured your mortgage. Ordering a new credit card is also a red flag to lenders. Because new credit increases your available debt, your net worth decreases. Also, do not move money between accounts or open new bank accounts. Even though the accounts may all be in your name, creditors do not like to see money move around just before you apply for a loan.

Do not co-sign on loans for others. If the primary person on the loan fails to make a payment, your credit rating will plummet. If this person makes late payments, your credit is adversely affected. In addition, co-signing a loan shows up on your credit report, and eats up your available credit.

Before you talk with a mortgage consultant, run a free credit report online. By federal law, you are entitled to a free credit report each year. The free report will not show you your FICO score, but you can see if there are blemishes or errors on the report. By running your free report, you can contact companies to correct errors. You will also have a better idea of your credit standing. You can order a report from www.annualcreditreport.com.

Jessica Bosari writes about personal finance, mortgage and other topics important to home buyers for Perth building inspection company, BSP Consultants.