A home mortgage loan application requires preparation especially if you have a spotty credit history. You’ll have to clean up your credit report and aim for a higher credit score if you want to apply for a mortgage. Once you have a good credit rating, maintain it to get a chance on low-interest rates with future loan applications.
What’s in a Credit Report?
Anticipate what a mortgage lender will look for in your credit report. These are the three things you should know.
- Source of income – A steady income is always a plus if you’re a wage earner. Despite what most people think, business owners will have a harder time to get a proper report because they’d have to prove their business will earn a stable income in the future versus a wage earner.
- Initial funding – Your capability to produce a large enough down payment might unlock additional bonuses such as lower interest rate, longer loan period and more.
- Credit history – Avoid anything that will destroy your credit history such as canceled credit cards, defaulting on other loans and more.
Correct any Inaccurate Information
Sometimes you’ll find entries in your credit report that mistake. Even with evolving technology, human errors will affect your credit report. It’s best to dispute these errors and have them corrected or else they’ll affect your credit history. Find credit bureaus in your area and deal with the matter as soon as possible.
Dealing with Delinquent Accounts
It makes sense that a mortgage lender would look at your ability to pay earlier loans and obligations. You might have skipped a few car payments, forgot to pay bills or any type of outstanding account. Here are ways for you to improve your credit rating especially when you have outstanding accounts.
- Pay it off – Immediately pay off that defaulted loan or late car payments. It might be hard on the wallet but getting rid of those outstanding accounts is the best way to improve your rating.
- Maintain payments – Once you’ve solved the backpay, bury that record by maintaining payment. Some lenders will look at records of 3 months back to at least a year back.
Understanding Debt-to-Income Ratio
Lenders will also look at your debt-to-income ratio to judge if you can make mortgage payments or not. They’ll look at your gross income and look at the possible debts you have. If your current debts and obligations don’t reach 20% then you’ll have a greater chance of getting approved. Just understand though that a mortgage will increase to debt-to-income ratio to as high as 40% of your income.
Avoiding New Debt
Keep your credit score up by avoiding any new debts prior to applying for a mortgage. A lender will factor in how these new debts will eat into your income and probably delay payments in the long run. This includes an application for credit cards as credit cards do have a way of eating up your budget. Learning how to improve your credit score doesn’t have to be rocket science. Just keep a clear head and budget your money every day and you’ll be fine.