March ushers in the warm weather, and along with it comes the busiest season of the year for real estate buying and selling. But don’t be too quick to run out the door and go house shopping, unless you can afford to pay for the whole thing in cash. Anyone who plans to finance their purchase using a bank loan will need to have good credit, especially these days. Lenders got burned during the collapse of the housing market and have tightened their underwriting guidelines. So one of the most crucial elements in the home buying process is the mortgage – and one of the keys to a successful mortgage application is great credit.
Here are some tips about how you can improve your chances of getting your loan approved. Keep in mind that those with the best credit are also the ones who are usually offered the lowest interest rates and mortgage closing fees.
The first step when working to boost your credit is to access your current credit score and credit report. You can do that by contacting one or more of the “big 3” credit reporting agencies, namely Equifax, Experian, and TransUnion. By law you are allowed access to this information once a year, for free, and if you want to see your file more often you typically just have to pay a fee of about $15.
Review the information in your files, and if you find any errors you have a right to dispute those, in writing, and ask for them to be corrected. It is a good idea to send as much supporting evidence and documentation as possible – such as payment receipts or letters from creditors.
Lenders are also keen on providing loans to people who are not already carrying a relatively large amount of debt. So you will want to lower the ratio of your debt to income as much as possible. If you have credit card debts, for example, try to pay those off. But don’t cancel the credit card accounts. Keeping your account open but not using your available credit demonstrates to the bank that you are disciplined about managing your money, and that will help when you apply for your mortgage.
Many homeowners have lots of incidental expenses that they incur right after buying a home, too, because they may need to buy furniture and other necessities. But try to postpone those purchases until after your loan has closed. If you start spending money before your loan is approved that will just increase your debt ratio and could prevent you from getting the loan you need.
Even after your mortgage is approved, though, you still need to curb your spending. That’s because many lenders will continue to monitor your debt levels right up until the time that you close on your purchase and take possession of the keys to the new home. In some cases banks have halted funding or made borrowers reapply for loans because the debts were too high. In other cases they went ahead with the loan funding but charged the homeowner a higher rate of interest. So wait until you have your mortgage in hand and the keys to the house in your pocket before going on any shopping sprees.
That isn’t always easy, and it can take time to bolster your finances and clean up your credit. But the time and effort you put into it will reward you with a smoother mortgage process and perhaps a lower interest rate – which could save you money for decades every time you make your monthly mortgage payment.