November 5, 2012

Real estate tips: Protect your credit to ensure a successful mortgage application.

Filed under: Real Estate — Chuck @ 8:37 am

There has not been a better, more affordable opportunity to buy a home in decades. Home affordability is typically measured by looking at the value of homes compared to their asking prices and by also factoring in the cost of financing a mortgage. Today we have all-time record low mortgage rates and bargain home prices, and various home affordability indices all confirm that this is a once-in-a-lifetime chance for buyers. But there is a potential obstacle. If your credit is not up to par it is difficult to qualify for a mortgage. Banks and other lenders are enforcing strict underwriting policies and are turning away many mortgage applicants.

How do you solve that potential problem? It is critical that you do everything possible to bolster your credit and improve your credit profile – before you ever submit your mortgage application. Here are some steps to take to help ensure greater success.

Check Your Credit File

There are three major credit reporting agencies in the USA and Canada, namely Experian, TransUnion, and Equifax. For a small fee you can get copies of your credit reports for you to review. But you don’t necessarily have to pay for those if you don’t want to. You are also allowed to get a free copy of your credit report mailed to you in Canada, and you can get access to your credit reports once every year if you are a citizen of the United States. Once you obtain these reports, check them for any errors, omissions, or outdated data. You can request that mistakes be corrected, and if erroneous information is found in your file the agencies have to fix it.

Avoid Frequent Loan Applications

Each time you apply for a loan, the lender checks your credit. Frequent requests for credit information from reporting agencies may indicate that you are desperate for a loan, however, or at least that is how banks view that kind of activity. So multiple loan applications can actually lower your credit score, and should be avoided. A better approach is to shop around for the best lender with the most attractive rates and terms. Then apply only once, when you’re ready to take out your mortgage. In the meantime be careful not to apply for other consumer loans either, including department store charge cards, credit cards, and auto loans.

Monitor Your Debt to Income Ratio

One of the most important components of your credit is the ratio of your debt to your income. Bankers like to see that your household expenses are 25 percent or less of your take-home pay. If you are carrying credit card debt, student loans, second mortgages, or other obligations you need to try to pay those off before applying for your home loan. Having low debt compared to your income will not only help your loan go through without a hitch, but it may also earn you a lower interest rate and more lenient terms.

Postpone Purchases Until After Closing

It used to be that once banks okay’d your loan application they lost interest in tracking your debt and credit profile. But in recent years, since the credit crisis of 2007-2008, they have started monitoring credit all the way through closing. So if your loan gets approved and you have six weeks until closing, for example, be careful not to make any new purchases or take on new debt during that interim period. Otherwise the bank may readjust your loan to a higher rate. In worse case scenarios they may even reverse their decision and decide not to fund the loan. Keep in mind that they typically pay extremely close attention to your credit report and debt levels from at least six months prior to loan application, all the way through funding of the loan and closing on your new home. Exercise financial discipline during those critical months and it can help ensure a smoother mortgage process.

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