Current house hunters can do things now to improve their financial situations and set themselves up for a better mortgage. Here are a few quick tips:
First of all, pay your bills and pay them on time. Any delinquencies will probably be seen by your lender as a risk factor in giving you a loan. To compensate for a “risky” borrower, your financer could raise the rates. While paying those monthly bills, work out a budget to pay down your debts. Lenders look at all your outstanding balances to determine whether you can afford the additional expenditure of a mortgage. For credit cards, experts recommend you bring the amount owed down to 30% or less of the credit limit to really make a difference. But even if you completely pay off a credit card, do not close it out because this can actually hurt your credit score. And don’t apply for more credit before buying a home as this can also negatively affect your standing with lenders.
What if your credit score is less than favorable? How can you bring it back up before going to the lender for a mortgage? First, request a credit score (the three main suppliers are Equifax, TransUnion and Experian) and check for any errors. If you find any discrepancies (and most do), dispute the problems with the credit bureau and have the errors corrected ASAP. Keep copies and documentation of your correspondence with the credit bureau. They are supposed to investigate the issue within 30 days, so notes can help you can keep track of the progress. I’ve already mentioned paying off the cards. Well, start with the high interest rate cards first and those that are closest to the maximum limit. Refrain from using your credit card for big ticket purchases that consume a huge percentage of the available credit. Generally, it’s best to spend no more than 50% of your available credit. And while you’re paying down the debt on your card, it’s smart to use cash or debit card to buy things – so as not to derail your efforts. There are professional consultants who can help you repair your credit score, too, just be sure to use a reputable company.
Then, when the time comes to get the mortgage, explore a few different lenders and get quotes from each. You shop around for the best deals with groceries and other consumer goods, so why not with your home loan? After deciding on a lender, talk with them about how much the down payment amount can influence the mortgage rate. The general rule of thumb is – the more you put down the better. But go over specifics with your lender to find out how that extra few thousand would affect the rate – it could save you tens of thousands in the end.