Check Your Credit Report Before Applying for Any Home Loan
Whether you're purchasing a new home or looking for a home equity loan or refinance, lenders look closely at your credit report. While a credit score of 700 used to be an excellent number, lending regulations have gotten stricter, and 700 does not carry the same power as it once did. Prior to applying for any loan, order a copy of your three main credit reports (Equifax, Experian, and TransUnion) from the website the federal government set up: AnnualCreditReport.com. Once you have these in hand, carefully look them over and watch for the red flags lenders look for.
Employment History
Lenders want to see people with a solid work history. If you bounce from job to job, lenders may feel you do not have the steady income needed to repay a home loan, especially if you are going for a 30-year mortgage. If you have just left one job for any reason, it's smart to wait until you've been steadily employed for a year or more before applying for a mortgage or home equity loan.
Maxed Out Credit Cards
Having credit cards is not always a negative sign to lenders, but if you have credit cards that are maxed out, it will affect your score. Prior to applying for a home loan, pay off some of your credit card balances. If you pay the entire amount off, do not close your account. Closing accounts often impacts your credit score, too.
Look for Delinquencies or Collections
If you missed a payment with another loan company, get the account paid up before applying for home loan. This may mean you have to delay plans, but delinquencies show up on a credit report. In fact, many companies report the past seven years of payments. Let any late payments or debt collection notices head to the bottom of the list before applying. This often means waiting a year or more. Negative information that is three years old is going to have less impact than negative information that occurred in the last month.
Take Note of Any Errors
If you spot anything that is not yours, send letters to the three reporting agencies and have the information removed. This process can take up to three months to complete, so postpone applying for a home loan until errors are removed. Arm yourself with documentation that supports errors, such a bank statement to prove payments were made on time.
Debt Versus Income
Lenders pay very close attention to your monthly income versus your monthly debt. In December 2013, new qualifications came out regarding the debt-to-income ratio in the United States. Now to get a qualified home loan, your debt cannot exceed more than 43 percent of your income. Having a higher debt to income puts you at risk of being denied a home loan or paying higher interest rates and fees. Total up all the debt for installment or revolving credit that is listed on your credit report. If you have a debt-to-income ratio that is higher than 43 percent, You may need to take a second job to boost income or pay off debt before applying for a home loan.
