Protecting Your Credit
My business partner and I have been helping good people buy and sell homes in southwestern Ohio for years, and though most home buyers are successful , there are some situations that could have worked out but failed due to unwise credit activity.
I wanted to share some of these situations for readers to help buyers be better qualified and lessen the risk of their financing falling apart, but also command a better credit score prior to seeking a pre-approval from a lender. Getting pre-approved is not just important, but absolutely necessary before going house hunting. Many are caught by surprise when they can't get approved for the requested mortgage loan amount or not get approved for a real estate purchase at all.
Avoid a Home Buying Horror Story
Several times in recent years, together with lenders we've helped clients with borderline credit, anxious to own a home but blew it at the worst possible time. For example, we had a buyer earlier this year, approved for $175k, had an accepted offer and his credit score was within 10 points of the minimum for the loan. In his excitement, he went to Home Depot to purchase a $4,000 riding mower on credit and was subsequently denied.
The 10 point hit he took on his credit score generated a call before closing from the loan officer informing us the loan was now not possible and the buyer couldn't complete the transaction. Now, the buyer's choice is to get pre-approved for a significantly less amount and settle for less home, or spend a few months getting the score back up.
It's now been eight months since that client's original accepted offer and looks like he'll be unable to buy until next year when prices are higher.
I refrain from referring buyers with challenged credit scores to credit repair companies as most of them are barely worth it if worth nothing at all. Especially considering there are many reasonable and prudent ways to grow and preserve a good score prior to shopping for a home.
Simple Credit Tips:
- DO pay on time, obviously! That's a no-brainer, or least should be. Set reminders for yourself to check payments due on the 1st and 15th of every month and never be late again.
- DO Keep a 30% balance or below on credit cards and for even better scores, pay your balances down to 10-20% of your credit limits.
- DO pull your credit information prior to house-hunting, many are surprised by inaccurate, damaging information. Did you know, if a clerk misspells your name when submitting data that will end up on your credit report, some credit reporting agencies ding your score for having an "alias"? Yep. Even things that should have fallen off according to different terms may still be on there.
- Do NOT pay off credit cards. Avoid paying them off to a zero balance. Yep, charge a little something if you have to, but don't pay a balance off completely, show sensible buying and payment activity for the best scores.
- Do NOT close out any credit accounts. One thing lenders like to see is "seasoned credit", and the more mature a line of credit is the better. Closing out a credit card will definitely drop your score.
- Do NOT open new credit accounts prior to seeking a pre-approval unless you don't have a line of credit. Again, a credit account has to season and show sensible buying and payment activity.
- Do NOT give in to urges to buy something on credit after getting an accepted offer! A slight difference in your credit card balances and charge accounts can be just enough to cause your financing to fail, and one of the saddest circumstances to experience. Pay cash, or just hold off until after your closing date.
Lastly, grow those credit limits early on. If you're planning to buy down the road, let's say 12 months, if you keep your balances low and show sensible buying and payment activity without being late you should ask for a credit limit increase about 6 months before seeking pre-approval for a home loan. Higher limits are reflections of better credit, but always keep the balances low. With a higher credit limit you'll want to keep the balance percentage even lower, after all, lenders look at debt - income ratios.
Paying down the debt is standard advice. If you're trying to lower the balance on a credit account, be sure to pay an extra 50% on your payments to get ahead of interest. Factor the total mortgage payment (principal and interest, tax escrow deposits, home insurance policy, mortgage insurance premium, home-owners' dues, etc.) and all monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take the total of monthly debt and divide by the gross monthly income. 43% is currently the maximum ratio to qualify.
Will the new FICO scoring help you? Check out this blog post from Miranda Imperi of Union Home Mortgage.