Credit Faux Pas

Applying for a mortgage can be a stressful process. It’s stressful enough to have to really sit down and look at your financial profile, but when you add on concerns over whether or not you’ll be able to get the home you have always wanted you’ve created a recipe for giving yourself more than a few new gray hairs. The best way to make sure you can apply for the mortgage you need with as little stress as possible is to start your mortgage planning early on. Perhaps the most important step you can take in your mortgage planning is making sure you keep your credit in good health so you look like a strong candidate for your desired home loan.

There are a few active steps you can take to keep your credit in good health and to look like an attractive financial prospect to the bank, but most of the steps you need to take are preventative. If you simply focus on avoiding the following credit faux pas you won’t need to sweat when you apply for your mortgage.

First, you want to keep your overall level of debt as low as possible. A huge percentage of your credit score is determined by the amount of debt you presently hold. The amount of debt you hold affects your credit score in a couple big ways. The more debt you have the greater your monthly payments on that debt. The greater the monthly payments you have on that debt, the less money you’ll have to contribute to your mortgage. The less money you have to contribute to your mortgage, the less likely you will receive the mortgage you need on the terms you want.

Now, debt is relative when it comes to your credit score. An individual who makes $100,000 a year and has $10,000 in debt is going to be a much more attractive prospect than an individual who makes $25,000 a year and has $10,000 in debt. Banks will also look at your current debt load in terms of how much total credit you have. So an individual with $5,000 of credit who holds $500 of debt from that credit looks better than an individual with $1,000 of credit who holds $500 of debt from that credit.

No matter how large your credit line and how high your annual income, overall the less debt you have the more attractive you will look to mortgage lending institutions such as banks.

However, remember the attractiveness of your credit profile depends on not only how little debt you have but also how much free credit you have on hand. So while paying down your debt to skew this ratio in your favor is a wise move, closing out your credit once it’s paid off (and removing that open stack of credit from your profile) is a bad move.

Closing out lines of credit isn’t the only credit faux pas you can fall into when applying for a mortgage- you can also take on new debt. Using your credit cards when you’re applying for a mortgage is a very, very bad move, but it’s not the only method of accumulating new debt which you should avoid. Don’t take on car loans, student loans, or other forms of “good” debt either during the mortgage process.

Finally, when paying down your debt keep an important point in mind. Paying off accounts with collection agencies is generally a good idea because it reduces your debt load. But overall it’s significantly better to negotiate with those agencies to DELETE your accounts from all reporting agencies and bureaus. After all, having an account with a collection agency will always look bad, even if you’ve paid that account completely off.

Holding a large amount of debt is a serious problem for your credit, but so is handling that debt poorly. Perhaps the biggest credit faux pas you can make is having negative marks on your credit report from missing monthly payments or otherwise making them late. Someone who has $4,000 of debt but who makes all of their payments on time can look better to the banks than an individual who has $400 of debt but hasn’t made a payment on time in a year.

Building a negative relationship with debt is the worst faux pas you can enact when it comes to getting the mortgage you need, so make sure you keep your debt in good order well before you apply for your mortgage.