Many first-time homebuyers do not realize that credit card history can be the determining factor in whether or not you will leave your lender’s office with a pre-approval. Bad spending habits can greatly hinder your chances of not only qualifying for a mortgage, but making sure your credit scores stay as high as possible.
Fortunately, these credit card habits can be broken or even better, prevented. Here are some tips on how to avoid common mistakes and increase the likelihood of not only having desirable credit scores, but also receiving a mortgage loan approval.
1. Don’t pay late. If you are consistently paying your credit card bill late, your credit score will suffer. Lenders pull a tri-merge credit report and use the actual middle score to determine the worthiness of your credit; a percentage of that score is determined by your on-time payment history. To correct this problem, set up automatic payments online. This way, you can ensure that your credit score is not affected in a negative way.
2. Don’t overuse your credit. Your score is also determined by how much money is owed on all of your credit cards. This is determined by your credit utilization ratio, a calculation of the amount of credit you have used in relation to your credit limit. Using more than 50 percent of the available credit on any of your cards will likely cause your credit score to drop. Know your limits, literally, and carefully monitor your credit card accounts.
3. Don’t apply for too many credit cards at once. Applying for multiple credit cards at the same time is viewed, by the credit bureaus, as if you are having financial problems and may cause your lender to reconsider underwriting a big loan. It’s better to wait to apply for new credit cards until after you’re settled into your new home. Applying for several different types of credit (auto, store credit, major credit), can also deteriorate your scores.
4. Don’t avoid credit cards completely. Responsible credit card use is important in establishing credit. Lenders like to see a reliable credit history before handing over large sums of money. For this reason, if you do not have any credit history as a young adult, you should apply for a credit card today. Using a credit card on a consistent basis, and paying promptly, will help to make you an ideal candidate for a home loan. If you are unable to open up a major credit card, start with something small, like a store credit card, or even a secured credit card will help in getting your credit history started.
5. Don’t rack up debt. Having a substantial amount of debt could easily prevent you from being eligible for a mortgage. Paying off your credit card debt in a timely manner and paying more than the minimum payment can make you a more desirable candidate for a loan. We suggest keeping your balance at 50% or below of the allowable limit; this allows for the credit bureaus to see you are using your credit, but not too much of it.
For more information about applying for a mortgage and how your credit card history many impact you, contact Stuart Epstein at 410.491.0200 or sepstein@baybankmd.com, your Mortgage Consultant for Life.
