6 Pre-Mortgage Moves People Recommend (But Are Big Mistakes)
Rose Parish8-minute read
September 24, 2021
Your credit score carries big stakes when it comes to getting a mortgage. Even if you’re sure to be approved, a marginally higher score can mean a change in your interest rate. Since mortgages deal with vast amounts of money over multiple decades, those changes can be meaningful. For instance:
- Half a percentage point on a 30-year, $300,000 mortgage works out to $22,500 in interest.
- One percentage point on a 15-year, $600,000 mortgage works out to interest of $45,000.
That’s why many people take steps before applying for a mortgage to spruce up their credit rating. Done right, this can save the price of a car, a year of college tuition, or a once-in-a-lifetime vacation.
Done wrong, however, it can have the opposite effect.
6 Bad Pre-Mortgage Credit Moves
1. Stopping The Use Of Credit Cards
On the surface, this seems like a good idea. Using too much credit hurts your finances overall, and having too high a total balance can tank your credit score. How much you owe in credit, compared to how much credit you have available, makes up 30% of your credit score.
So why not freeze your credit usage until after you get approved?
Because 35% of your credit score is credit history. A consistent pattern of using credit and paying it off, especially with a low balance as compared to your credit limits, is what builds a credit score rapidly. If you just stop using your credit cards altogether, that prevents you from continuing this kind of credit building.
- Bad example: After struggling to pay off all your credit cards, you cut them up and don’t use them until you’re in your new home.
- Even worse example: You stop using your credit cards, but you don’t pay them down. So, there’s no history of usage and payments, and the usage-to-limit ratio is damagingly high.
- Good example: You stop using your credit cards for regular purchases. But you put one of your utility bills on each card, then pay each off a day or two after the purchase hits the account.
- Important exception: If you’ve found you can’t have active credit cards without using them, then canceling or shredding the cards is better than misusing them, even if it’s worse than using them correctly.
- See also: Don’t cancel old cards you’ve paid off but never use. Length of credit history is another factor in your credit report, as is unused available credit. Unless those old cards have a high non-usage fee, keep them active.
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2. Having Low Expectations
This mistake is subtle but all too common. It’s possible to qualify for a mortgage with a surprisingly low credit score, even with a bankruptcy or foreclosure in your history. You won’t get the best terms, but you won’t necessarily be disqualified.
When shopping for a mortgage with poor credit, it’s easy to assume you’ll only get approved for a loan with bad terms. Don’t let a bumpy credit history keep you from shopping multiple lenders, asking for improved terms, or walking away from a deal that’s not right for you. Go in with realistic expectations, but don’t resign yourself to accepting a terrible loan.
- Bad example: You take an expensive, problematic first offer because you believe you’re lucky to get approved at all.
- Even worse example: You alter or lie about your financial history to get a better loan. This is a felony.
- Good example: You shop around to multiple lenders for multiple offers, then compare them just like you would if you had a perfect credit history.
- Important exception: For some credit situations, a single stipulation like mortgage insurance might be mandated.
- See also: Don’t forget that a wide range of federal, state, local and nonprofit programs exist to help people get mortgages who wouldn’t usually qualify for them. Shop these options as well to help get the best loan possible.
3. Consolidating Debt
We need to be clear here. The right debt consolidation move can be perfect for your credit and your mortgage if you do it right. It reduces your usage of existing credit cards while also freeing up money every month to pay down existing loans. The trouble with debt consolidation and mortgages is timing.
If you shop for a mortgage too soon after consolidating debt, any credit checks and new accounts your consolidation required will show up and reduce your score. If you use a credit card balance transfer offer to make it happen, the percentage of use on that card could be high enough to skew your numbers.
A third potential issue is your debt-to-income ratio. If that debt consolidation loan has a high payment, it could mean your monthly bills are too high compared with your monthly income for the mortgage payment you want.
- Bad example: You consolidate your debt two months before shopping for a mortgage. All the credit action it requires shows up and ruins your score.
- Even worse example: You consolidate debt to clear your credit cards and then spend on the cards. You now owe even more money.
- Good example: You consolidate debt 18 to 24 months before buying a home and use the advantages to improve your finances and credit score further.
- Important exception: Some mortgage deals include consolidating debt into a home equity loan or a larger primary loan as part of the deal.
- See also: You can set up a DIY debt consolidation through a home equity loan. If you do so while you’re considering a home purchase, make sure to take that extra home debt into account.
4. Slacking Off After Initial Approval
This mistake is common because people don’t fully understand how mortgages work. With most loans, once you’re approved, the lender never looks at your credit again. You drive away with your new car or get your new credit card in the mail, and as long as you make your payments on time, nobody worries.
A mortgage deals with much more money than any other loan you’re likely to get in your life. Because of this, the lender will usually check your credit twice. The first time they check will be when they approve your loan, but they’ll look again just before signing. If your credit has taken a severe dive in between, they can cancel the deal.
- Bad example: You use credit cards to buy all the furniture you’ll need for your new house a day or two after getting approved.
- Even worse example: You miss your current mortgage payment in between approval and signing.
- Good example: You continue to build your credit strategically and carefully until your mortgage has been funded fully.
- Important exception: In some cases, it can be beneficial to set up a home equity loan/second mortgage in that interim space. Check with your loan officer or mortgage broker before doing this, however.
- See also: Avoid committing to any long-term expenses in the time between getting your mortgage and settling into the new payment. This will make a significant change to your monthly cash flow, and you should fully understand it before taking on new commitments.
5. Getting Other Credit Accounts
We’ve touched on this in passing, but the concept is so important it needs its own section. Applying for new credit accounts hurts your credit score for up to a year after the application. This is especially true if you apply for many accounts or deny even one of those applications.
It’s understandable why some people feel like this is a good move. The decision to buy a home or refinance naturally makes you think about your overall credit and finances. That thinking might lead to wanting other new loans to help position you. This is incredibly tempting if debt consolidation might improve your credit or finances.
All that is true, but it doesn’t change what setting those new accounts up can do to your credit score and, thus, the price of your mortgage. Wait to make those moves until after you’ve signed.
- Bad example: You shop for a personal loan to help reduce credit card balances in the months before applying for a mortgage.
- Even worse example: You apply for multiple credit cards in the six months before you apply for a mortgage.
- Good example: You apply for no new loans except the mortgage in the year leading up to buying a home.
- Important exception: Several loan applications all at once (usually within 14 days) for a mortgage, or home equity loan typically count as a single loan application. That behavior represents responsible shopping, and lenders are aware of this.
- See also: One hack for improving credit without these applications is to get a family member or good friend with excellent credit to add you to one of their credit cards as an authorized user. You don’t even have to use the card. Their activity goes on your credit report.
6. Checking Your Credit Report Too Late
A recent Consumer Reports investigation found that 34% of Americans found at least one error on their credit reports. Those errors can cost you a mortgage approval entirely or make your mortgage thousands of dollars more expensive. You should check your credit report regularly, and especially if you’re considering a big credit move.
But you have to check it early. Reporting, proving and removing an error can take months to resolve. Wait too long, and the error will be there when lenders check your credit. Even if it gets fixed the day after signing, your mortgage terms will already have been set.
- Bad example: You check your credit score while you’re beginning to shop for a mortgage.
- Even worse example: You check your credit report only after getting denied for a mortgage.
- Good example: You check your credit report a year ahead of time, then manage errors immediately and consistently.
- Important exception: There are no exceptions to this rule. You should check your credit report every year and keep tabs on your credit score consistently.
- See also: Many banks and credit cards offer credit report monitoring as a free part of their online services. This tool can help you keep track of your score, but it only helps if you monitor the alerts and follow up on anything that doesn’t seem right.
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What To Do Instead
How to clean up your credit score in the months before mortgage shopping is enough to fill an article of its own. For now, consider these four reliable methods for fine-tuning those numbers before a loan officer or mortgage broker takes a look:
- Prioritize paying all your bills on time if you can’t prioritize paying the bills that show up on a credit report.
- Stop applying for new credit of any kind.
- Pay down your credit cards strategically, getting an excellent usage-to-limit ratio on as many cards as possible.
- Ask for a limit increase on as many credit cards as possible but don’t use the new space in the accounts.
If you’re renting, consider some services like RentalKharma, which report your successful rental history to Experian®, TransUnion® and EquifaxTM. These options cost a little money but can make a surprising difference in your credit report after even a few months.
If you’re interested in applying for a home loan, visit Rocket Mortgage®.