Applying for a Mortgage: What’s Your Credit Looking Like?

credit score home buying

One of the first stops on your road to purchasing a new home is getting pre-approved for a mortgage loan. That is, of course, unless you’re one of the truly fortunate people who can pay for your home in cash. (Uhm. Bravo, you?!)

Seeking help from a lender? The good news is that your credit reports don’t need to be spotless to qualify for a mortgage. But … they do need to meet your lender's minimum qualification standards. So before you run out to apply for a loan, you’re going to want to prep your credit reports and scores.

Review ALL of Your Credit Reports

Perhaps the most important step you should take to prepare your credit for a mortgage is to check all three of your credit reports, one each from Equifax, TransUnion and Experian. That may sound like a no-brainer, but you’d be surprised by how many people rarely check their credit reports.

You can access a free copy of each of these reports once every 12 months at AnnualCreditReport.com. Other websites offer free access to your credit reports more often, but they’re going to ask you to become a registered user so they can send you marketing emails. The reason you have to check all three? Because that’s what your mortgage lender will do.

Unfortunately, a mortgage lender will not be able to excuse information on your credit reports just because you say it’s incorrect. If you discover any credit reporting mistakes, you will need to resolve them

Obtaining your three reports is step one. Step two involves checking those reports very carefully for errors. When credit reporting mistakes occur, and they often do, they can potentially damage your credit scores. Unfortunately, a mortgage lender will not be able to excuse information on your credit reports just because you say it’s incorrect. If you discover any credit reporting mistakes, you will need to resolve them.

The Fair Credit Reporting Act (FCRA) gives you the right to dispute any information on your credit reports that you think is incorrect. When you dispute an item you are formally placing the credit bureaus on notice that you believe an error to be present. This sets off a series of events mandated by federal law and designed to protect you.

According to the FCRA, when you dispute an item with a credit bureau, it must investigate your claim and inform you of the results of its investigation within 30 days, or, in some rare cases, 45 days. If the creditor/collection agency does not or cannot verify the accuracy of the disputed item to the credit bureau, then the offending entry must be deleted from your credit reports.

Seriously Pay Down Those Credit Card Balances

Another important step in preparing your credit for a mortgage is to pay down your credit card balances to as low an amount as possible. Whether you realize it or not, large balances can impact your credit scores quite a bit, especially if they represent a large percentage of your credit cards’ limits. This is true even if you consistently make on-time monthly payments.

Optimally you’d have balances that represent only a very small percentage of your credit limits, below 10 percent, if possible. If you can’t simply write a big check and eliminate all or most of your credit card debt at once, keep in mind that even reducing your balances in small increments could potentially still benefit your credit scores.

Are You Sure You Need More Credit?

It can be difficult to earn great credit scores if you don’t have enough old accounts or the right mixture of accounts on your credit reports. Of course you shouldn’t open up a bunch of new credit lines prior to a new mortgage application simply to prove to a lender or the credit scoring Gods that you’re worthy. Some things simply take time and will happen organically as you continue to use credit.

And finally, don’t be tempted to go out and apply for credit in a desperate attempt to boost your scores just prior to applying for a mortgage loan. This can backfire: The new credit will likely cause your mortgage lender to ask for an explanation. And, if you’ve incurred any debt on the new credit account, it will absolutely have an adverse impact on your debt-to-limit ratio, which could put a mortgage loan in jeopardy.