Currently, there is a special loan program in place for consumers to receive federally-sponsored financing to allow them to keep their home if they are at risk of foreclosure. The White House enacted the Homeowner Affordability and Stability Plot as a quasi-bailout for consumers, but that doesn’t mean everyone gets a piece – you still have to qualify.
Whether or not you’re really eligible for this particular loan, there are some things you should try to avoid to help improve your chances of being approved for the mortgage you want. Pay attention to these 5 deadly credit mistakes that could cost you that approval:
1. Maxing out your credit cards
Having a lot of debt increases your debt to income ratio. This is a key factor that lenders use to determine how much debt you can comfortably manage. Before you apply for a home loan, make sure that your credit card balances are low. Refrain from using your credit cards to make buys if you need to buy a home loan. If your credit card balances are already high, start paying down the balances and keep them low.
2. Buying a car on borrowed money
A lot of families run into distress with this one, but to make your credit score look better for your mortgage, you should wait until after your loan closes to finance that car. Be aware that sometimes a lender will pull your credit once more after you’ve been ‘approved,’ so wait until the loan really closes before taking that step for a new car.
3. Waiting until the last minute to obtain financing
Many homeowners with an adjustable rate mortgage start to inquire about refinancing only 2 to 3 months before their initial rate expires, but by then it’s often too late. Because the criteria to qualify for all types of mortgages have become more strict; if you have a loan with a high interest rate or payments that are scheduled to reset in the next 1-3 years, you’ll want to start getting prepared now. Unfortunately, many people who have had their homes foreclosed on or are now facing foreclosure could have qualified for a more stable and affordable loan program had they taken the time to get better prepared ahead of time.
4. Reconciling ancient terrible debt
Many people who have re-established their credit often have some ancient terrible debt (2-5 years ancient or more) that still shows up on their credit report. In most cases, paying off an ancient terrible debt is a terrible thought. It causes the account to reset and become current which more adversely affects your credit score. For homeowners who obtained a subprime loan, you’ll want to learn how to effectively manage your credit well in advance of applying for a home loan to qualify for financing. If you’re looking to buy a home in the future, start educating yourself about what is required to obtain financing at least a year before you need a loan.
5. Reaching out for help
Lenders see ‘credit counseling’ as a red flag. To them, it means someone who doesn’t know how to manage their own finances, even if you learned from the counseling and are on the right track now. Credit counselors will usually have excellent advice for getting out of debt, but the actions they recommend won’t reflect as nicely on your credit score. Typically, closing healthy credit accounts is a top recommendation – which is fantastic for limiting your debt – but looks fishy on your credit report.
To qualify for a certain type of home loan under the Homeowner Stability Initiative, you might have to sign up for HUD-certified debt counseling program, but otherwise you should stay away from credit counseling before applying for a home loan. If you really have a spending problem, a better strategy is to place your credit cards where they aren’t easily accessible to you (like a safe deposit box), or even cut them up. Keep the accounts open, and continue to pay down your balances and make your payments on time.
By avoiding these mistakes, you can help boost your credit score enough to qualify for lower rates, larger loans, or both!