Do you need to fix credit before applying for a mortgage?

Taking on a mortgage is probably going to be the biggest financial move most consumers ever make, and as such it can have lasting implications for years or even decades. Because of this, would-be homeowners should try to do all they can to prepare.

Because mortgages can total hundreds of thousands of dollars, the amount of preparation that consumers will need to make before entering into such an agreement is significant. One of the easiest ways to do this is doing all they can to make sure their credit health is up to snuff on their end. Of course, because this is a lengthy process, potential borrowers should take several months at least to address the various issues related to their credit standing.

Where to get started
Many consumers may not realize it, but mistakes they made in their borrowing history can come back to haunt them for years if they’re not careful. For instance, the single biggest aspect used by lenders to determine a borrower’s credit rating is their payment history. It accounts for 35 percent of their total score and for that reason, it is extremely important to have as healthy a payment history as possible.

The problem with that is that lenders can be tough graders when it comes to this aspect, and in many cases, missing one deadline by even a single day can do major damage to one’s credit score. For this reason, it’s important for borrowers to make sure they’ve made several months or more of consecutive payments on time and in full before they even begin thinking about looking for a mortgage. The longer they go without missing a deadline, the better their credit health will be. Along similar lines, any accounts they’re currently behind on paying should be addressed first to make sure everything is more or less the same page.

Cut debt obligations
Another major issue many borrowers may encounter when trying to deal with their credit is that they are simply carrying too much debt. In general, lenders like to see borrowers carrying debt of about 30 percent of their total available limit or less to max out this portion of their score, which appropriately makes up 30 percent of their overall rating.

And as with the payment history aspect of the score, there is a related issue for borrowers to deal with here: Debt-to-income ratio. Making efforts to slash their debt will not only improve their credit score overall, but will also improve the amount of debt they carry versus the income they take in every month. Consequently, if they have fewer obligations overall, their debt-to-income ratio will be improved, and that will show lenders that a borrower is in a better position to successfully make payments on the sizable mortgage they may be seeking. Obviously, during this time it’s also a good idea to try to avoid taking on any new debts within a few months of applying for new accounts — whether they’re credit cards, student loans, auto financing or the like — so that you’re not adding to the balances that you have worked so hard to reduce. Further, making too many inquiries for new lines of credit in a short period of time can also reduce one’s credit standing.

See where you stand
Most borrowers are probably aware that their credit standing plays a major role in their eligibility for financing overall, but some might not know that it also affects how much they pay at the closing table and over the life of the loan. Costs like points and even interest rates can go up or down depending on a mortgage applicant’s credit rating, so the more work they’ve done to improve their standing, the better off they’ll be when it comes to finding the most affordable terms on their home loan.

Unfortunately, borrowers can typically only do so much on their end to improve their standing through more consistent payments and continual attempts to cut debt. Consequently, they should also take the time to order a copy of their credit report, and check it over closely. This is because many credit reports contain unfair markings that may mar a borrower’s overall standing. Fortunately, if any are discovered, it’s possible to work with a credit repair agency that can help to put these entries to rights and return a borrower’s standing to where it deserves to be.

Of course, mortgage lending is still somewhat tight nationwide, and borrowers should be prepared not only to face a lengthy approval process, but also to shop around before committing to any one agreement so that they can find the loan terms that will be the most beneficial for them both now and many years down the line.

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