Your credit score is a vital asset to your home purchase. Higher credit scores lead to lower interest rates and open the door to more mortgage finance options for you. As you search for a home it may seem that certain financial decisions make sense (such as closing credit card accounts) when in fact, they hurt your credit status. Keep the following Do's and Don't's in mind before you purchase your new home.
1.) DO NOT: Apply for new credit cards or lines of credit just before or after submitting your mortgage loan application. Yes, that new flat screen, 3-D, 4-K, Ultra HD, 70 inch LCD TV available with no payments for 6 months with in-store credit may look good in the family room you imagine you are going to have in your new home. But it may not look good to the underwriter deciding whether you are a responsible borrower or to the credit reporting bureaus whose mathematical formulas see such activity as warranting a reduction in your credit scores.
NOTE: As a general rule, you should have at least 2 trade lines (i.e. a credit card and a car loan) with a minimum 12 month payment history on both before applying for a mortgage loan. However, some lenders will allow you to substitute traditional trade lines (a credit card or car payment would be considered a traditional trade line) with non traditional credit histories such as utility, phone or cable bills provided one of the non traditional trade lines is housing related. (i.e. 12 months of rent payments)
2.) DO NOT: Max out or run the balance(s) on your current credit card(s) to the limit or even near the available limit. This can have a dramatic impact on your credit score. Try to keep the balances on all of your cards below 50% of the available credit limit. 30% or below is even better.
3.) DO NOT: Consolidate your credit card debt into one or two cards. As stated above, you want to keep your balances as low as possible. Also, having an active credit history of timely payments is good for your score so you don't want to eliminate a credit line with a good payment history from your credit record.
4.) DO NOT: Close your credit card accounts as doing so would affect the amount of credit you have and may make your ratio of debt to available credit higher than it should be. Again, you also want to keep a good history of payments active on your credit record. If you want to close the account you can always do it after you have purchased your new home.
5.) DO NOT: Transfer or gift your assets. Even though you may only need some of your assets for a down payment to purchase your home you still may be required to have a certain amount of reserves remaining in your accounts in order to qualify for the mortgage loan. Therefore, if you are in the process of applying for a mortgage loan this is not the time to be performing benevolent acts with your assets such as paying off your child's student loan or car loan - even if you have already been approved for your mortgage loan. Any transfer or gifting of your assets should wait until after the closing.
NOTE: If your tax advisor or attorney wants you to make any such transfer(s) of your assets as part of an estate or financial plan prior to closing then you should follow their advice. Just be aware that the transfer(s) may have an adverse impact on your mortgage loan application. Discuss the possible implications of planned asset transfers with your loan officer.
6.) DO NOT: Make any large deposits into your accounts that you cannot legitimately explain. Such deposits may be viewed as proceeds from additional loans you have taken.
7.) DO NOT: Quit your job or change careers. Quitting your job should be obvious. Changing careers may seem like a personal choice you have earned but it may not be the best move for your mortgage future. Although this is not a hard and fast rule, remember that employment stability is an important factor for a mortgage loan underwriter.
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1.) DO: Stay current on all of your existing accounts. One late payment - especially a mortgage late payment - can make you ineligible for your loan program.
2.) DO: Pay down credit cards that have balances which are closest to the available credit limit. You may need to weigh this against having enough money for a down payment. But if you have the extra money and are looking for a positive impact on your credit score - this will help.
3.) DO: Use an old credit card (with a good payment history) you haven't used in a while for something small like dinner and a movie. This will keep the card active in your credit history and give it more weight. Just be sure to pay off or keep the balance very low so that it has a positive impact.
