However, there’s more to moving than finding your dream home. You have to consider the location, how much you can afford, and what loans you may qualify for. One of the most important factors in determining what mortgage you qualify for, and the rate you receive, is your credit score and credit history.
This is why we put together a list of Do’s and Don’ts of getting your credit ready to buy a home in Colorado.
Your credit score is a large determining factor when it comes to the mortgage you will qualify for. If your score is extremely low, you may be turned away for the loan completely. At the very least you’ll end up paying more for the home you want. Even 0.5% higher interest rate means paying nearly $10,000 more on a $500,000 loan.
You should start the process of going through your credit score at least 3 months prior to applying for a mortgage. This should give you enough time to settle any errors, pay down some of the debt, and work with creditors to increase your score.
This may seem counterintuitive, but the truth is paying off collections debt that is 3-5 years old can actually cause your credit score to go down. It can also reflect negatively on your credit history.
Many times when you pay off old collections, the debt resurfaces as if it happened recently. This isn’t a problem if you start the process of repairing your credit a year or more in advance. However, avoid doing this if you’re planning on applying for a mortgage within the next 3-6 months.
Something else to be aware of is paying off collection debt that is past the statutes of limitations. In Colorado, this timeframe is 6 years. This means is you are no longer liable for the debt if it hasn’t been collected within 6 years. Paying off a debt that has expired might cause your credit score to drop and you’ll be throwing money away that could go towards your down payment, or at least a new couch for your new home.
Paying down your debt will increase your credit score and look good on your credit report. The lower your Debt-To-Income (DTi) ratio is, the better offer you’ll get on a mortgage. This includes a lower interest rate and increased amount you may be offered.
Paying your debt off and keeping your DTi as low as possible during the homebuying process, and leading up to it, can help lead to a smooth experience in getting your mortgage approved.
While paying down your debt is one of the best ways to increase your credit score and help with qualifying for a great mortgage, closing those accounts can have the opposite effect.
It may seem odd, but by closing your accounts, you actually increase your DTi ratio, since your credit limit decreases. This doesn’t apply so much if you completely pay off your debt, but still make sure to keep one or two cards open and active in order to continue to build your credit history.
Another thing to consider is how long your credit accounts have been open. If you have credit accounts that have been active for a long time it reflects well on your credit history. This shows that lenders can trust you to not only pay off your debt but also that you’ll most likely be a long-term borrower.
This one comes in closer to the actual house buying process, but is still very important. Make sure to keep a good line of communication open with your realtor and/or loan officer. They can help find solutions for many problems that might come up. They are professionals within the industry and can generally provide guidance and support to help you get your credit to where it needs to be.
Don’t: Use Credit Repair Organizations To Dispute All Negative Accounts
Credit Repair Organizations have become more and more popular over the past 10 years, but the truth is they can cause more problems than they solve when it comes to qualifying for a mortgage.
While having all of your negative accounts disputed may raise your credit score initially, it’s a bad tactic and a huge red flag to lenders. It isn’t a bad thing to dispute a few legit negative accounts and get them fixed, but the more you try to get rid of, the bigger of an issue it may be. Some lenders will require you to provide proof that these disputes are legit, while others will turn you down without question.
Start Working On Your Credit Now
It’s never too early to start thinking about getting your credit in shape, especially if you’ve had a lot of problems in the past. While many problems can be fixed, or at least lessened, within a few months, others will take time. This is especially true if you have a high DTi and need to concentrate on paying down the debt.
Your credit score can affect a lot of things in life, but none more drastically than buying a new home. The last thing you want is for a low score to cause you to pay tens of thousands of dollars extra, or worse lose out on your dream home altogether.
Contact us today, or click below to find out if you pre-qualify!