Buying a home is such a milestone event in our lives that we want to make sure that when we are ready to buy, we do everything we can to make the process go smooth and as problem free as possible. Potential home buyers may not understand that building the foundation for a successful home purchase begins many months in advance of when you actually plan to buy. As you plan for your upcoming home purchase, here are five credit mistakes to avoid when buying a home.
Check your Credit Early and well Before you Plan to Buy a Home
Most of us are not perfect financial people and that means many consumers have one thing or another that might need to be fixed or updated on their credit report. And since everyone has a unique financial profile, fixing a credit problem for one person might take a short period of time, but for the next person it might take several months or more to fix a more serious problem that exists on a credit report. The lesson I have learned as a loan officer who has reviewed 1,000’s of credit reports over the years, is the most important thing a potential home buyer can do to prepare themselves to buy a home is to review their credit early and well before they plan to buy a home. That way, whatever comes up, you have sufficient time to fix the problem so you can get your credit score up to where it needs to be.
Be Sure Not to Max out or Overcharge your Current Credit Cards
Managing one’s credit utilization is so important to maintaining a good credit score. Credit utilization is defined as the amount of revolving credit you are currently using divided by the total amount of revolving credit you have available. For example, if you have a combination of credit cards with $10,000 in total credit available, and you have a balance of $4,000 between the cards, then your credit utilization is 40%. You can calculate your credit utilization on a per card basis or on a total credit available number based on all of the credit cards that you have.
Ideally, to maintain a good credit score you will want to keep your credit utilization ratio at or below 30% of your total available credit. Doing so demonstrates that you can manage credit usage between a number of credit cards and credit limits.
Do Not Make Any Late Payments
Late payments on any type of credit account can be “crushing” to one’s credit score. Be mindful well ahead of when you plan to buy a home, or any time for that matter to do everything possible to not make any late payments on your credit accounts. In order to prevent this from happening, try to set up your payments online for automatic deduction from your checking account each month on a day that is convenient for you.
Do Not Make any Large Purchases
This mainly applies within 30 – 60 days of the closing date on a home. But depending on the item purchased like a car, it can apply to a much longer period of time ahead of when you plan to buy a home. For example, lenders will calculate your debt to income ratio (DTI) as part of the pre-qualification process and you want to do everything possible to reduce your debt to income ratio rather than add to it.
Try not to buy an expensive car as far out as 12 – 18 months ahead of buying a home, and if you must purchase a car, buy a used car with a payment of $200 or less per month. At all costs, avoid buying a new car with a high monthly payment, doing so could increase your debt to income ratio and prevent you from qualifying to buy a home.
When you are within 30 – 60 days of purchasing a home, avoid making large purchases such as appliances, furniture, electronics, or anything else that will adversely affect your debt to income (DTI) ratio. This includes the time after your loan officer tells you your home purchase loan has been approved, but your closing is still some days away. Do not make any large purchases until your loan is complete and the Title company tells you the transaction has been recorded.
Do Not Co-Sign on a Loan
Co-signing on a loan for a friend or family member might seem like a noble thing to do to help them out, but it can be a devastating credit move that prevents you from buying a home. Co-signing on a loan means that the loan will appear on your credit report and the debt needs to be added in to your debt to income ratio. Depending on how large of a payment it is, this could prevent you from qualifying to buy a home.
In addition, if the person does not maintain an on-time payment history, any missed or late payments can and normally do drop your credit score. Depending on how far your credit score drops this may affect your ability to buy a home.
Following these rules on what not to do before buying a home could keep you out of credit trouble and on track to complete your home purchase on your schedule. These credit rules are easy to follow and the mistakes are easy to avoid when you know what to do and what not to do when managing your credit.
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