How to ensure you get the best possible interest rate you can.
The key is to become a better borrower. Is it possible to influence the type of deal you get? Yes, especially if you avoid these missteps.
1. Not Checking Your Credit Report
The three main credit bureaus — Equifax, Experian, and TransUnion — keep track of your credit history, including lines of credit, payments, and available credit lines, among other data. While most information collected is similar across all three bureaus, it’s possible to find differences between reports.
When checking your credit reports, it’s most important to check for errors or misinformation. Accurate information can’t be deleted, but any information that can’t be verified or that’s inaccurate can be removed. If errors on your credit report are impacting your credit score, it’s best to have them removed before applying for a mortgage.
Get a free credit report from each of the three bureaus once a year at annualcreditreport.com.
2. Opening New Lines of Credit
Before shopping for a mortgage, it’s best to minimize your number of credit inquires.
Will Lender Inquiries Ding Your Credit?
Worry not. FICO regards several lender queries in a short time as a single query, which shouldn't have much effect.
credit inquiries. These come when you apply for a new line of credit. Lenders use your FICO or other credit score to evaluate your creditworthiness.
Although FICO doesn’t provide insight into the number of points added or subtracted for specific credit activity, it does note that new credit lines account for 10% of your overall score and that “inquiries usually have a small impact.” However, even a small negative impact could potentially increase the mortgage rate for which you qualify.
3. Increasing Your Debt Load
Your credit score is calculated based on a number of factors, including payment history, amounts owed, and the mix of credit and new credit. Each factor is given a percentage weighting. For the FICO score, amounts owed on accounts are weighted as high as 30%. A larger number of accounts with balances can indicate a higher risk for the lender.
For revolving accounts such as credit cards, the credit utilization ratio is what you should watch. It’s the ratio of the amount you owe on your card to your available credit, and it’s calculated as a percentage. For example, a $10,000 line of credit with a $2,000 balance shows as 20%. Reducing your total amount of debt or minimizing debt from revolving accounts could help you get approved.
Beyond your credit score, your debt-to-income ratio could also affect your mortgage deal. A debt-to-income ratio of under 36% is necessary for a loan to conform to Fannie Mae guidelines. Many lenders lend according to those guidelines so that they can take advantage of the special programs provided by this government-sponsored enterprise. The debt-to-income ratio will factor in all of your debt owed, including credit cards, student loans, and any other debts listed on your credit report.
4. Forgetting About Special Loan Programs
You may qualify for special programs that could reduce the cost of getting a mortgage. For example, you may qualify for one of the VA loan programs. These programs, provided by the U.S. Department of Veterans Affairs, cover service members, veterans, and eligible surviving spouses. There are also programs that help first-time homebuyers and eligible rural homebuyers, and even state-based homebuyer programs.
5. Applying with Fluctuating Income
Mortgage lenders require paperwork to verify your financial situation, including but not limited to debt, income, and assets. If you receive a paycheck, you may be asked to provide two years of proof of employment via W-2 forms. If you have a habit of switching jobs often with gaps in between, that unsteady income could delay your approval as the lender seeks other methods to verify your creditworthiness.
Before applying for a mortgage, make changes where necessary so you can get the best deal possible. Seek to improve your credit, minimize your debt load, and search for special programs. Depending on how much you owe and the state of your credit, you may need to begin this process one to two years in advance of purchasing a home.
BY LATISHA STYLES