From Application to Home Ownership: How to Manage Your Credit

Before applying for a mortgage, borrowers need to build a plan for how they are going to manage their credit going into the mortgage application process as well as while they navigate through it.

Lenders review credit reports for both credit score and credit habits as well as overall debt obligations, they will review a tri-merge credit report (which means they review a single credit report that pulls together information from Experian, Equifax and Transunion) to assess your willingness to repay your obligations. While there are minimum credit score requirements for mortgage loans, that isn’t all that we look at….we need to also see your patterns and habits with your current debts. Here are a few must-dos when preparing to apply for a home loan:

Pre–Checking Credit Reports

Before meeting with a lender to start the loan application process, borrowers can benefit from checking their own credit reports to see what shows up. It is important to look for both the credit scores as well as the credit report itself; lenders look at both. A credit score alone isn’t a full indicator of what might be on your credit. What are the primary things you should look at?

• Ensure that your name, birthdate, social security number and addresses are accurate – if they aren’t this could be cause hiccups in the process but also could be an indicator that someone else might have gotten ahold of your personal information.
• Next, review the individual accounts themselves. Is anything showing up that you aren’t familiar with? Have all payments been paid on time?
• Check the list of companies that have inquiries (or hard pulls) on your credit. These typically indicate that you applied for credit at this company.
• Lastly, check for any derogatory credit which can be a collection, charge off, lien, bankruptcy, foreclosure, etc. If these are present ensure you know what they are related to as you will be asked this question during the application process.

If you find anything that doesn’t look familiar, you can reach out to the credit bureaus directly to file a dispute or have them check into the accounts, alternatively you can reach out the company on your credit report that is reporting the information and try to gather more information. It is advisable to have these items resolved as soon as possible so it doesn’t impact your loan application. If you are considering paying derogatory accounts, or closing any accounts please contact your local lender first to discuss the potential impact of those actions on your credit.

Assess and Manager The Debt To Income Ratio

Mortgage lenders calculate a borrower’s ability to repay the loan they are requesting based on something called the debt-to-income ratio (DTI). DTI is calculated by taking the total amount of monthly payments (including the proposed payment for the mortgage loan) and dividing it by the qualifying monthly income. If you have too much debt or not enough income you won’t qualify for the loan terms you are seeking. It is important to review this prior to starting to look at homes so you don’t get your heart set on something that you can’t afford. For more information about DTI, visit our Guide to Mortgage Income Requirements.

Avoid Taking On New Debt

When an applicant takes on more debt while applying for a home loan, it can cause three problems:

1. The inquiry can lower their credit score.
2. The payments can change their DTI.
3. The lender could view this as a flag that the customer is over-obligated (meaning spending more than they make).

Getting a mortgage can be tough, but at Summit Mortgage, we’re here to help make it as smooth as possible, which starts even before you enter the loan process. Through education and proactive steps, you and your Summit Mortgage Loan Officer can help your loan process to run as easy as possible!

Want to get started now? Complete our Quick Start Form and we’ll connect you with a loan officer that matches your specific needs. They’ll provide a free consultation and guide you through every step of the loan application process.