Before starting the process of shopping for a home, explore the following five areas to see how you will look in the eyes of a lender:
1. Credit Report errors
The key to getting the best mortgage rate is good credit. One in four adults have serious errors on their credit reports. The Fair Credit Reporting Act requires credit-reporting agencies to fix these mistakes but it’s up to you to find the problems and to ask for the errors to be corrected. We discussed Increasing Your Credit Score in an earlier post.
Tell the credit reporting agency about any errors you find.
You can initiate an investigation online for all three credit reporting agencies. If you use the online dispute feature on the credit-reporting agency web site, also send them a letter certified mail with return receipt requested.
Each agency has a phone number listed for disputes. If you call, keep detailed notes and follow the phone call with a letter. Tell the creditor about any mistakes.
Send a letter to the creditor notifying it that you dispute the information that the creditor has reported. Explain what information is incorrect and ask the company to stop reporting it. Include copies of information that supports your case.
2. Closing credit card accounts
Paying down credit card balances will improve your financial picture, however, reducing your amount of available credit by closing accounts can actually lower your credit score.
For credit cards, the law defines billing errors as any charge:
- for something you didn’t buy or for a purchase made by someone not authorized to use your account
- for something that is not properly identified on your bill or is for an amount different from the actual purchase price or was entered on a date different from the purchase date
- for something that you did not accept on delivery or that was not delivered according to agreement
- errors in arithmetic
- failure to show a payment or other credit to your account
- failure to mail the bill to your current address, if you told the creditor about an address change at least 20 days before the end of the billing period
- questionable items, or any item for which you need more information
The addresses set up to receive disputes should appear on your credit report or you can initiate the dispute online.
3. Getting rid of HELOC
If you already own a home and have an existing home equity line of credit, or HELOC, keep it. You may need the funds again in the future and won’t have to go through the trouble of applying for one.
4. Getting in over your head
There is a difference between the maximum payment you can qualify for and the amount you can comfortably afford. Know the difference. If you’re just getting by with your current rent payment and the lender says you qualify for more, think about it!
5. Changing jobs
Lenders like to see a steady history of employment and frown on job changes while your application is pending, unless the new job is in the same field and at the same or greater pay. If you do take a new job, experts suggest getting a letter stating you’ve completed the probation period for a new job to allay lender concerns.
When you’re planning to purchase a home, the first step is to clean up your credit history and get your financials in order. Be prepared to spend the time and effort it takes to make yourself credit worthy. The better your credit report, the lower the interest rate you will qualify for.
Feel free to leave questions or comments below on cleaning up your credit history.