It doesn’t matter if you are buying your first, second or third home, you’ll still need to apply for a mortgage to finance your home buying process, unless of course you are buying cash. And, in order to qualify for a mortgage, you need to have an outstanding credit score.
The process of applying for a mortgage can sometimes be long and tedious, with lenders checking every little thing about your financial history. They review your past and current finances to make sure that you have the financial capability to take on a loan.
To improve your chances of qualifying for a loan, here are some tips to help you lessen your debt and increase your credit score.
- Point out and correct credit inaccuracies. Whether it’s an outdated address or unpaid bills from several years ago, lenders still consider these info when checking your credit score. Your data has to be accurate and up-to-date. For example, an incorrect or outdated address on your credit report would give an impression that you often change addresses and that you are financially unstable. Late payments also reflects negatively on your credit report, even if you have paid them off already. Check your credit report from Trans Union, Experian and Equifax and report to the credit bureaus any inaccuracies in your report. You will also be required to provide documentation to support your claim.
- Get out of co-signed obligations. If you co-signed before, for example for a student loan, credit card or car loan, remove your name from the co-signed agreement. Having co-signed obligations means you are also responsible for that loan and lenders take that as a risk. You can call the lender for your co-signed obligation and start the process of removing your name.
- Reduce credit card balances. Credit card debts rake in a lot of interest, and this makes lenders hesitant to approve loans where the borrower has huge credit card balances. Lenders want to be sure that there will be no other financial obligations that will impede you from paying off the mortgage. To increase your chances of qualifying for a loan, slash your credit card spending and start to pay off your balances. Keep your credit card spending at less than 30% of your credit limit. This move will dramatically improve your cashflow, lower your debt and improve your debt-to-income ratio.
- Resolve unresolved debts. Even if you have some unpaid debts in the past, you can still qualify for a mortgage if you take solid steps to bandage your credit history. Reach out to the creditors or collectors and offer a feasible and honest plan to pay off the debt. The goal here is to pay everything and erase your balances using a step by step plan, unless you have the money to pay off the debt entirely. Make sure to follow your plan and get documentation or proof of payment which you can show to the credit bureaus and update your credit report.
- Credit consolidation. If your debts are all over the place, find a zero or low interest credit card that offers debt consolidation. This way, all the other balances will be wiped out and you will now be paying only one card with less interest per month.
Your finances play a huge part in getting approved for a loan. Therefore, it is important to take measures as early as possible to minimize or wipe out your debt.