Avoiding Credit Mistakes when Applying for a Mortgage

When a homebuyer is in the market to buy a house, looking for the perfect home can be very exciting. When you need a mortgage to buy a home, obtaining that mortgage can be stressful. While you don't want to make any mistakes when it comes to choosing the right home, you also want to avoid mistakes when it comes to applying for and being approved for your mortgage.

Securing your financing first will let you know how much mortgage you can afford and what your price range is. Therefore, we suggest finding a reputable lender who can help you do this before beginning your house hunting.

You can either be pre-qualified or pre-approved for a mortgage. The difference between being pre-qualified and being pre-approved is very different. Getting pre-qualified for a mortgage means the lender takes your total income and expenses and lets you know how much of mortgage payment you can afford. When you are pre-approved for a mortgage, the lender not only takes your income and expenses to determine how much of a mortgage payment you can afford, they also run your credit and gives you an idea of what your interest rate and closing costs will be.

Being pre-approved for a mortgage provides you with a more realistic picture of what your mortgage will cost you and what the final terms of your mortgage will be. It also carries more weight when submitting a contract on a home because the seller knows the lender has already run your credit and knows your qualify for the needed mortgage.

However, regardless of whether you are pre-qualified or pre-approved for a mortgage loan, it is not a final mortgage approval. Your credit report will be run before final mortgage loan approval is determined. Therefore, it is very important to understand what can affect your credit score and your final loan approval.

If you were pre-approved for a mortgage loan, you know your credit report has already been run and evaluated by your loan officer and as long as nothing changed, you should feel confident that you would receive final loan approval.

However, many people do not know what affects their credit score and what can affect a final loan approval decision. Once you have applied for a mortgage loan, avoid the following to help make sure you get your final mortgage approval!

1. Do not apply for new credit! Each time you apply for new credit, your credit report is run and new credit inquiries show up on your credit. New credit inquiries affect your overall credit score.

2. Do not incur more debt! Taking on new debt affects your debt to income ratio, which can disqualify you for your mortgage. So, if you are thinking about buying a new car or a TV for the new family room, do not go shopping for these before you have closed on your home!

3. Make all credit payments on time! Late payments negatively affect your credit. If your credit report shows late payments, it could disqualify you from getting your mortgage.

4. Do not consolidate credit card debt! While your intentions may be good, any change in your credit could have an adverse effect. If you have a credit card that has a high credit limit but a low balance, do not payoff low balance credit cards using a card with a higher limit. Putting a higher balance on to one card changes your debt to asset ratio, which can actually affect your credit negatively.

5. Do not increase balances on credit cards or lines of credit! Higher balances can increase your minimum monthly payments and change your debt to income ratio. Even a slight change can disqualify you from getting your mortgage.

5. Do not make any large cash purchases! Part of your loan approval is based on how much verified cash you have in the bank. If you use your cash to make a large purchase, this will lower your cash reserves and have an impact on your final loan approval.

6. Do not put large deposits into your bank account! All deposits must be documented and accounted for. Your lender will require copies of your bank statements. If there are deposits made other than your standard payroll deposits, you will have to explain where the money came from.

7. Do not dispute credit report items or pay off collection or charged off accounts! Unless your lender advises you otherwise, disputing items or paying off old collection or charge off accounts can also have a negative impact on your credit. Again, while your intent may be good, it could adversely affect your credit and disqualify you from getting your home loan.

8. Do not change jobs or quit your job! If you are looking to change or quit your job, don't do it without notifying your lender first. The length of time you have been at your job could be an important aspect in your final loan approval decision. Income is just as important. Quitting your job could certainly disqualify you from getting a home loan. Additionally, if your income is based on commissions, bonuses or overtime and this income has decreased, notify your lender immediately. Any changes in your job or your income can have an adverse affect on your approval.

Other items that have an effect on your loan approval are the cost of your homeowner's insurance and Homeowners Association Dues as they affect your monthly mortgage payment. Be sure to get a homeowner's insurance quote from your insurance agent before you submit your loan application so you can provide the information to your lender. Additionally, if you plan to purchase a home in a neighborhood where Homeowner's Association dues are required, find out what the monthly, quarterly or annual dues are and give that information to your lender, as that will also have an effect on your monthly mortgage payment.