How to make yourself desirable to mortgage lenders

Whether or not you can buy a home often depends on your ability to get a mortgage, and this can be a challenge if your credit history isn’t perfect. But there are things you can do to make yourself a better credit prospect before you approach a mortgage lender. Here are a few of them:

Pay your bills on time. One of the things that count most toward building your creditworthiness is paying your bills. A missed payment, or one that’s 30 days late or more, can end up on your credit report and stay there for up to seven years. But even if you’ve had some late payments in the past, a good recent credit history may impress a lender. So, if you don’t have a budget, create one today and start making sure you live within your means.

Avoid excess credit. Having a small number of credit accounts helps build up your credit rating, but having too much credit can hurt it. Avoid adding new accounts or taking out new loans shortly before you apply for a mortgage. Having a number of recent credit applications on your record can make it look like you’re loading up on credit (however, this doesn’t include multiple inquiries for the same loan). Also, keep your credit balances low. Lenders like your debt-to-income ratio (the amount you get when you add up all of your regular monthly debts such as car, mortgage and minimum required credit card payments and divide that amount by your total gross monthly income) to be no higher than 36 percent.

Check your credit report. It’s never a bad idea to check your credit report, but it’s especially important to do so 60 to 90 days before you apply for a loan. Make sure all the information is correct, and if you find any problems, notify the credit-reporting agency immediately. You don’t want incorrect information to have a negative impact on your credit score. This is important because if you have a score of 720 or above, you will likely be eligible to receive a lender’s most favorable rates. Between 620 and 720, you may not receive the best rate on your loan but you should still have little trouble obtaining financing. Below 620, however, you fall into the category of a “sub-prime” borrower, meaning your options will be more limited and you could end up paying as much as 3 percent more for your mortgage than someone with excellent credit.

Pay down your debt. The best way to improve your credit score is to pay down outstanding debt; just shifting it to another account doesn’t solve the problem. Concentrate on high-interest debt such as credit cards -- the creditor may be willing to help you set up a repayment schedule. Consolidating your debt into one lower-cost loan may also help, or you may need to see a reputable credit counselor. And improving your score takes time; it may take a few months before your credit rating improves.

Hold off on closing credit accounts. While closing credit accounts would seem to be a great way to improve your credit rating, it can actually have a negative effect. Since it reduces your overall amount of available credit, it can end up increasing the percentage of your available credit that you are using. This is known as increasing your “balance-to-limit ratio” and it can actually hurt your credit score. But remember, keeping your credit accounts open doesn’t mean using them to incur additional debt. That, again, would have a negative affect.

Apply for a smaller mortgage. Reducing the size of the mortgage you are applying for should make it easier to qualify for the loan. Since the payments will be smaller, there is less risk for the lender and more certainty that you will be able to meet the payments. This means you’ll have to raise a bigger down payment, however, or settle for a lower-priced home.

Keep your job. Your employment record is also part of your credit profile. Lenders prefer a reasonable period of stable employment, so if you’re intending to take time off or change jobs, it may be better to wait a while.

Having a poor credit score may not prevent you from getting a mortgage. But lenders usually reserve their best rates for borrowers with a stable history of controlling their credit and paying their bills. Taking steps to improve your credit rating may result in your paying significantly less for your mortgage in the long run.

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