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3 Steps to Get Your Credit Ready BEFORE Applying for a Mortgage

Written by John Ulzheimer

The status of your credit reports always matters, but never more so than when you are preparing to apply for a new mortgage loan. Every loan represents some level of risk to lenders, and this risk means a borrower may or may not pay them back according to the terms of their loan agreement. Because of the enormous risk in mortgage lending there is a logical reliance on your credit reports and scores.

If you are preparing to apply for a mortgage then it’s in your best financial interest to make sure that all three of your credit reports and scores are in the best shape possible. Unlike most other types of lenders who generally rely on only one of your credit reports and scores, mortgage lenders will review all three during your application process. If you have any issues on your credit reports you run the risk of paying more for your loan or even having your mortgage application denied.

Here are 3 simple tips that you can and should take to help prepare your credit if you are planning on applying for a mortgage anytime in the near future:

Mortgage Prep Tip #1: Review All 3 of Your Credit Reports Thoroughly

It’s not uncommon for credit reporting mistakes to occur. In fact, millions of credit mistakes occur every single year. Sometimes these mistakes are irrelevant, but other times they can spell disaster for your credit scores. Thankfully, you have the power to do something about mistakes and errors on your credit reports when they occur, but you can only exercise this power if you are proactive about checking your credit reports in the first place.

Checking your credit reports is easy. Once you have obtained your reports go over them with a fine-toothed comb and make sure that all of the information contained in your reports is accurate. If you discover errors the Fair Credit Reporting Act (FCRA) gives you the right to dispute any erroneous items directly with the credit reporting agencies: Equifax, TransUnion, and Experian. You can also dispute the items with the furnishing party, generally a bank or a collection agency. In either case once you’ve put the “other side” on notice that you dispute the accuracy of your credit reports they must perform a reasonable investigation and correct any errors within 30-45 days.

Mortgage Prep Tip #2: Get Rid of Outstanding Credit Card Balances

Credit card debt is an extremely significant factor when it comes to the calculation of your credit scores. In fact, 30% of your FICO and VantageScore credit scores are based on your revolving utilization ratio, which is the relationship between your credit card balances and your credit limits. Simply paying your credit card payments on time is not enough to earn great credit scores. You’ll want to pay your cards off, and leave them paid off, until after your loan is closed. Of course this isn’t possible for everyone so do the best you can and just recognize the fact that the lower your balances, the better.

Mortgage Prep Tip #3: Avoid ANY New Credit

Applying for new credit and opening new accounts can be problematic for your credit scores. In fact, taking on new credit obligations prior to a mortgage can hurt your credit scores in two ways. First, anytime your credit reports are pulled as part of an application for a new account a hard inquiry is placed on your credit report(s). Hard inquiries have the potential to cause damage to your credit scores for up to 12 months. The damage may not be huge, but it could still cause problems for you during a mortgage application especially if you’re already a marginal borrower.

The second way which a new credit account can potentially have a negative impact on your credit scores has to do with the fact that credit scoring models pay close attention to the average age of the accounts on your credit reports. As your credit reports “mature” and your average age of accounts increases your credit scores tend to follow suit. However, when you open a new account you decrease your average age of accounts and your credit scores have the potential to go down. Generally the credit score shift is minimal, but when it comes to a mortgage application sometimes even a single credit score point can be significant.

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John Ulzheimer


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