Your credit score can affect the loan program, purchase price and timeframe of when you qualify for a mortgage. Get these 5 bad credit skeletons out of the closet before you apply and set yourself up for a successful home buying experience.
No Credit to Report
There’s a common misconception that not having any credit means good credit. Theoretically, that seems like it should be the case. Lack of credit history means you’re able to manage your money and be self-sufficient. However, it also makes it hard to measure how you would handle paying back a debt. If you are looking to purchase a home in the future, you should start working on creating a score immediately. If you don’t have anything to report on your credit, there is no data to base your credit worthiness on and it is often a daunting and tedious task for a borrower to create non-traditional tradelines.
Bankruptcy, Foreclosure & Short Sales
These events can linger and be more detrimental than any other. Every program adheres to different guidelines for each of these. Know where you are, how much money you have for a down payment and how soon you are hopeful to purchase. There are certain programs that will allow you to purchase days after a derogatory event like this. However, you will likely be coming in with 20 to 25% for a down payment.
Some may think that because a student loan is deferred or in forbearance it doesn’t need to be considered for debt to income ratio. Think again. Depending on the loan program, your income-based payment up to your fully amortized payment may be counted against your debt to income ratio. This is hands down the quickest way to drop a well-qualified candidate down to an unrealistic purchase price. Know your numbers, know when your accounts come out of forbearance and plan. Talk to a mortgage consultant to map out your goals.
Credit Utilization & Credit Mix
You would be surprised how many times someone will apply for a mortgage on the basis they have a good credit score. After reviewing their credit, they are surprised to find that they are unable to qualify or qualify for as high as they would like because that credit score is solely based on one credit card, which was opened just three months ago. While this gives you a decent credit score, you still need a diversified mix of credit. This includes rental agreements, credit cards, auto, and student loans. An estimated 10% of your credit score is based on credit mix alone.
New Credit & Inquiries
Applying for a new account and having a bunch of inquiries hit you can harm your credit. If you are applying for credit and are continually being denied, instead of trying with someone else, determine what is stopping you from getting credit granted and fix that first.
Looking out for your financial well-being will help you before, during and long after the home buying process. Don’t be afraid to reach out to your mortgage consultant with any questions or further tips on getting your credit ready to buy a home.