Avoid these mistakes when applying for your mortgage
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By Scott Sheldon  October 12, 2012 12:00 am

For many, seeking a home loan is an exchange of trust and privacy when it comes to providing a Social Security Number to obtain a credit report. The credit report is one of the foundational pillars mortgage companies use to originate a loan by taking into consideration debt obligations which impact borrowing ability. After reviewing thousands of credit reports, following are some of the biggest credit score mistakes we see consumers make frequently on mortgage applications.

Don’ts:
• Don’t co-sign for someone else’s obligation. This includes auto loans, and yes, even mortgages. Like it or not, you are just as responsible as the other party by co-signing on any obligation.

• Don’t close out credit cards. This sends an artificial signal to the credit bureaus you cannot manage your liabilities, keep them open.

• Don’t cut up your credit cards. You actually have to use your credit cards and gain a use history in order to support a healthy credit score.

• Don’t rely solely on cash for spending purposes. Get and use credit regularly because not having credit is actually worse than having bad credit.

• Don’t assume to not pay something because you feel it’s not justified. Working with the creditor will preserve your credit report, subsequently your credit score.

• Don’t rely on the credit report you get from free online credit companies, from auto dealers or credit card companies. By far, the most accurate and detailed credit report you will ever get is from a mortgage lender.
• Don’t worry about your credit score dropping because your credit report has been pulled too many times. More often than not, your credit score should be unaffected so long as it’s within a 30-day period.
 
Do’s:
• Keep your credit card balances at no more than 30 percent of the total of all the credit lines.

• Understand mortgage companies pull three credit scores. Called a Tri-Merge credit report, one score from each credit bureau Trans Union,  Equifax & Experian, and the middle score is used.

• Pay off credit cards in full on a monthly basis, even if the interest rate is zero percent. Nothing is worse than having your future dollars mortgaged by an obligation you can easily pay off.

• Ask previous creditors, especially on high-ticket items like mortgages, to correct any erroneous reporting on your credit report. Surprisingly enough, this occurs quite frequently.

• Pay off old, even delinquent collection balances, including medical collections if possible. What will more than likely happen, after doing so, is your credit score will drop, and then it will rise substantially.
• Take out the big car loan after you get the mortgage loan. Doing so prior will result in a potential restriction of the amount of money you can qualify to borrow.

• Keep track of your credit score. The site www.annualcreditreport.com will allow you to download a free copy of your credit report.

• Know that in order to get a mortgage loan to purchase or refinance a house, your middle credit score must be at least 620 or greater for conventional financing and 640 or greater for government financing, including first time buyer programs.

The best way to make sure you’re keeping track of your credit score is to make sure you’re consistently paying bills on time and actually using credit.
Using credit, and paying off balances in full, creates activity (use history) and thus supports a good credit score.

In essence, a good credit score is built by using the credit obligation and sometimes paying the interest associated with whatever credit obligation you’re working with. For example, while an auto loan will reduce the amount you can borrow, it also has the ability to dramatically increase your credit score, provided you make timely payments.

If you would like to discuss your situation, whether purchasing or refinancing, we can help. Learn how to avoid the common credit score traps consumers get themselves into when getting a mortgage.

Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.

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