This guide covers how to prepare credit for mortgage and get approved. Homebuyers planning to apply for a home loan should consult with a loan officer to see if they can prepare credit for a mortgage. Credit scores will determine whether or not borrowers qualify for a home loan. Credit Scores will also be the determinants of mortgage rates.

Many consumers also have errors on their credit reports. It takes time to correct errors on the credit report. If credit scores are low, there are quick fixes to boost credit scores quickly.

Again everything takes time. Instead of waiting at the last minute, borrowers need to consult with a loan officer. Review credit reports and credit scores. See if there are ways to prepare credit for a mortgage. Even if credit scores are good, try to get them higher to get the best available mortgage rates. To get the best available mortgage rates, consumers need credit scores of 740 or higher.

Credit Card Balances Affect Credit Scores

Borrowers with credit cards maxed out to credit limit. This will hurt credit scores. The best way how to prepare credit for mortgage is by having low credit card balances of 10% of the credit limit.

It will take a month or two for the credit bureaus to have credit card balance information updated on the credit report. Once the lender pulls credit, the credit scores will be used throughout the mortgage application and approval process to the closing date. It is best to have little to no balance on credit cards. This is because that will maximize credit scores. Speak With Our Loan Officer For Mortgage with Low Credit Scores

How to Get Credit Score for Mortgage?

Preparing your credit for a mortgage doesn’t need to be complex; here’s a simple method to ensure that your credit score is satisfactory before you proceed with a mortgage application.

Check Your Credit Reports

Make sure to start by getting complimentary versions of your credit report from all three main nationwide consumer reporting agencies, like Equifax, Experian, and TransUnion. This can be done once a year at no charge on AnnualCreditReport.com.

Understand Your Credit Scores

Lenders use FICO scores when they look at your mortgage application. The scores that are usually considered are FICO Score 2, 4, and 5. Each credit bureau may display slightly different score.

Monitor Your Credit

Take advantage of services like Credit Karma, Credit Sesame or Experian which allow you to understand what your credit scores say about you. These might not be exactly the same as the ones lenders use but they’ll give you a good idea of where you stand.

Improve Your Credit Score

• Avoid Late Payments: Being late on payments can really destroy your credit score.
• Reduce Debt: In order to increase the total amount of debt that you owe on revolving accounts so as to improve your utilization ratio for credit cards.
• No New Credit: Please do not open up new lines of credit immediately prior to applying for a home loan.
• Correct Mistakes: Search for inaccuracies found in these reports and dispute them.

Get Pre-Approved for a Mortgage

When it is time, apply for preapproval through one or more lenders who will perform hard inquiries into your applicant background including checking out FICO scores. However if you shop around within a short period (usually 45 days) all the inquiries count as one—so don’t worry!

Use a Mortgage Broker

This person could also provide information about his/her clients’ FICO ratings during the pre-approval process of a loan.

Ask Lenders for Your Scores

At the time when you are applying for a mortgage, ask lenders to provide your credit scores. This will give you a picture of what each lender thinks about you.

By following these steps, you’ll know how to prepare credit for a mortgage and be in a strong position when you apply.

How To Prepare Credit For Mortgage Without Paying Old Collection Accounts

Borrowers do not have to pay off unpaid collection accounts to qualify for a mortgage loan. Many home buyers or homeowners who need to refinance think they cannot get a home loan with unpaid collection accounts. That is not true.

Credit scores will drop by paying off an old dormant collection account with an unpaid balance. What happens is that the credit bureaus re-activate the old unpaid collection dormant account.

Re-activating older collections, credit bureaus report it as a new collection account when they update the paid collection. This will plummet the credit scores. If you need to pay off an old unpaid collection account, do so by negotiation of doing pay for deletion on the credit balance. This means the creditor will delete the derogatory item off the credit report instead of payment or settlement.

How To Get Mortgage Approval With Late Payments After Bankruptcy and Foreclosure

If you have late payments after bankruptcy or foreclosure, the best thing to do is to get new secured credit cards to offset the late payments. Get three to five additional secured credit cards with at least a $500 credit limit. Never be late, and monitor your credit report. Get signed up with a third-party credit monitoring service like Credit Karma. Get Mortgage Approval with Late Payments after Bankruptcy and Foreclosure

Do Not Dispute Derogatory Item During Mortgage Process

Many people with bad credit hire credit repair companies or try to repair their credit independently. Borrowers do not need credit repair to qualify for mortgage. Hiring credit repair is not how to prepare for mortgage. Many times credit repair can backfire and do more damage than good.

Credit repair works by disputing derogatory information by writing to the credit bureaus and stating that the item is inaccurate or the derogatory item does not belong to them. However, you need supporting facts and documentation showing the derogatory credit tradelines are legitimate and not just claims.

The credit bureaus then contact the creditor about getting the validation for the claim. The credit bureaus must remove the disputed credit items if the creditor does not respond in 30 days. Unfortunately, credit bureaus often do not follow the federal law of deleting unverified derogatory information. They leave the dispute on the credit report.

How Credit Dispute Process Work

The derogatory item on the consumer’s credit report states the item is in dispute, and the consumer disagrees. This statement on the credit report disqualifies borrowers from proceeding with the mortgage application and approval process until the credit disputes are fully retracted. Unfortunately,

Once the credit disputes are retracted, this causes the consumer’s credit scores to plummet. I have often seen a drop of 80 or more points when a dispute gets retracted.

Credit disputes on medical collection accounts are exempt. Credit disputes on derogatory accounts with zero balances are exempt.  Many times, lenders with overlays will request all disputes to be retracted.

How To Prepare Credit For Mortgage: What If I Have No Credit?

Having no credit is like having bad credit. Chances are, credit scores are low if consumers have no active credit trade lines. Consumers with no credit or closed out all of their active credit accounts get a few secured credit cards and start re-establishing credit. Consumers can also have their name added as an authorized user on a credit card account with someone with a low and good credit balance. Make sure that the main credit card holder is a responsible person with stellar credit. If the main credit card hold is late on their monthly payment, authorized users will get dinged and defeat the purpose.

Do Not Be Late on Payments or Apply For New Credit

Consumers can apply for credit but do not apply for too much credit.  A hard inquiry will drop credit scores by 5 points whenever consumers apply for credit.  Too many inquiries are frowned upon by mortgage lenders. Homebuyers can have prior bad credit and low credit scores and qualify for a mortgage loan.  However, they cannot have recent late payments in the past 12 months and expect to get a home loan approval.  Make sure never to be late on the minimum payment due.  A mortgage underwriter will carefully review the past 12 months’ payment history. Speak With Our Loan Officer For Mortgage with Low Credit Scores

FAQs: How To Prepare Credit For Mortgage and Get Approved

• 1. What does “credit approved” mean for a mortgage? “Credit approved” means that a lender has gone through your credit report and found it satisfactory in regards to their standards for home loans. It’s an indication of the fact that your credit history is good enough for them to consider you as a reliable borrower.
• 2. How do I start preparing my credit for a mortgage? Begin by obtaining cost-free copies of your credit reports from AnnualCreditReport.com at Equifax, Experian, and TransUnion. Look out for any mistakes and be well-informed about your credit score.
• 3. What are some tips to improve my credit score? For you to raise your credit score, ensure there are no delays in making payments on bills; decrease debts; avoid opening new accounts of borrowing before applying for the house loan; challenge any inaccuracies within one’s files.
• 4. Why should I monitor my credit? Credit Karma, Credit Sesame or Experian provide services which can help you keep track of your credit scores and understand your overall financial condition. Though they may not be exactly what lenders use while calculating scores but they can give you something close to where you stand.
• 5. What credit score do I need for the best mortgage rates? If you want the lowest interest rates possible on a home loan, try to have a FICO score of at least 740. Higher scores generally qualify for lower interest rates.
• 7. How do credit card balances affect my credit score? A high balance on one’s plastic money can damage his/her point rating. Optimize your scoring by having card balances under 10%of limit amount.
• 8. Can I get a mortgage with unpaid collection accounts? Yes, an individual can still secure a mortgage with unpaid collection accounts. Nonetheless retiring old collections may cause one’s FICO rating to decline due to re-activation of the account. In case you do need to pay it off, negotiate a pay-for-deletion with the creditor.
• 9. What should I do if I have late payments after bankruptcy or foreclosure? When you have late payments as a result of having undergone foreclosure or filing for bankruptcy, try getting new secured credit cards to rebuild your credit. Ensure you make timely payments and monitor your credit reports closely.
• 10. Should I hire a credit repair company to prepare my credit for a mortgage? It’s not essential to use credit repair companies, and sometimes they can have negative consequences. Instead, concentrate on ensuring timely payment of bills, minimizing debt, and rectifying any mistakes on your credit report.
• 11. What happens if I dispute a derogatory item during the mortgage process? Fighting over negative items during mortgage processing may delay the application process. The dispute status can disqualify you from moving forward until it’s resolved. Be warned though, once they are removed, your FICO score might drop.
• 12. How can I build credit if I have no credit history? Where one has no existing debts; he/she should apply for several pre-paid visa cards which will help him/her build some credits from scratch. Alternatively, one may be authorized by another person who has good previous financial records and low outstanding amounts in their card accounts.
• 13. Can I apply for new credit while preparing for a mortgage? It is advisable to avoid applying for fresh lines of borrowing while preparing for home loan approval. Every hard inquiry can cost about 5 points off people’s FICO scores and many inquiries raise suspicions among lenders.

Once you have taken these steps, you will be able to prepare yourself for a mortgage and increase your chances of getting approved.

If you have any questions about How To Prepare Credit For Mortgage or you need to qualify for loans with a lender with no overlays, please contact us at 800-900-8569. Text us for a faster response. Or email us at alex@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.

This blog about How To Prepare Credit For Mortgage and Get Approved was updated on July 1st, 2024.