Mortgage Approval Credit Requirements Step by Step
Picture this scenario: A happy couple or individual has never purchased a home and would love to be homeowners in the future, BUT doesn’t know the mortgage approval credit requirements. In addition the future homeowner may have other common roadblocks such as…
* There is not a lot of credit report experience or there are credit issues.
* Has no money in reserves or for down payment
* Doesn’t have a budget in order to afford a house payment
* Pays cash for rent most of the time or lives with family rent free
* Doesn’t really understand how a realtor can help them find the right home
* Has maybe heard of an FHA loan but that is about it for mortgages
* Doesn’t know how to be prepared for a mortgage or closing
This is a series of articles that will take a prospective homebuyer step by step, in detail, for how to be ready for home ownership. We hope that you find this helpful in taking the first steps towards being a homeowner! Understanding the mortgage approval credit requirements is paramount when buying a home. So let us show you how to buy up-front in easy to follow steps. To learn further details, contact us today.
Week 1: Establish credit that meets mortgage approval credit requirements for any type of mortgage loan
In a perfect world, a home buyer should have multiple mortgage loan options to choose from when considering a purchase. The problem is that many do not because of credit issues. The credit issues could be lack of credit, not the right kind of credit, or just bad credit. Either way, it is important to know EARLY how to cure these situations. But how does a first time buyer keep sane when there are so many types of credit scoring websites?
Let’s set the record straight with advice in 15 easy to follow steps to explain how to meet mortgage approval credit requirements for future first time homebuyer NOW!
- Get a mortgage credit report – When buying a home, the mortgage loan approval will be based on a mortgage credit report. Many online credit reports may be off by 100 points in scores or may only offer one of the three credit bureaus. So why use a credit report other than a mortgage credit report? That means it would be best to order a mortgage credit report with scores rather than other types.
- A knowledgeable mortgage loan officer should go over the credit report in detail. The loan officer should provide detailed notes for the buyer on what needs to be worked on in order to be in position to purchase. Mortgage approval credit requirements will be explained thoroughly. Hopefully there will be multiple mortgage loan options available for the buyer. Options could include VA, FHA, USDA, Down Payment Assistance, & Renovation Loans.
- Have a good mixture of credit lines: There is no perfect scenario but a good suggestion would be to have 2 – 3 credit lines or cards. Preferably the cards should have balances reporting under 10% of the credit limits. Additionally, it is best if the cards are open & active for a very long time. An installment loan like a car loan is good for a credit report. But too many finance company loans reporting can be a negative. Last but not least, mortgage loans paid on-time are very helpful. So once you own a home, a buyer will receive this benefit. Read specifics here: “You May Not Know It, But You Are a Number and It Could Help or Hurt You A LOT!“
- Don’t be afraid of credit cards. Many first time buyers with limited credit experience hear others talk about how credit cards ruined their credit. This only happens when credit card spending gets out of hand. This can cause high balances, then maybe late payments, and possibly a collection. So use credit cards as a credit building tool. This is the best way to establish credit without going into debt! 30% of a credit score is comprised of balances compared to credit limits as a percentage. So using cards the correct way is almost a third of your scores!
- Don’t borrow money on an installment loan just to establish credit! If you don’t need the loan, don’t get it because you are paying interest for no reason (see recommendation 4 above). You would be better off by systematically putting money into a savings account and leaving it alone. Believe it or not, a mortgage lender will look at this as a credit reference because a buyer is choosing to regularly invest in themselves every month rather than pay interest on a loan. It won’t help a credit score, but it will go a long way for the buyer overall financial health.
- Be careful about paying off collections! Believe it or not, if you pay off an old collection it will make the date of last activity now. That could either lower or keep your credit score the same in the short term. Often a creditor will negotiate with you on a collection pay off so they get their money now. They may even agree to “delete” or “remove” the collection from your credit so make sure you ask. So refer to #2 above and get your loan officer’s advice. Read more Common Misconceptions About Credit Scoring.
- Be aware that credit repair, whether done by you or a credit repair company, can often leave “dispute language” on your credit report. Dispute language excludes those items from the score and mortgage company’s automated approval systems which makes the credit report downgraded and could hurt approval chances. So once done with credit repair, clean up the dispute language. Mortgage approval credit requirements vary based on loan types for disputed accounts. Read more about Credit Repair Consequences-How to Remove Disputes From Credit.
- If you feel that you lack the knowledge or time to fix the areas of concern, then you could hire a credit repair specialist. Here are suggestions. First, interview credit repair companies about the charges, their opinion of your success in the program (don’t believe ones that say all 20 of your collections will be deleted forever and you will have an 800 score, as that is rare), and ask how long it should take (don’t go longer than 6 months in credit repair because if it hasn’t been removed by then, it is not coming off). Finally, look for someone knowledgeable in mortgage approval credit requirements too.
- Pay everything on time no matter if it is a $10 per month or $500 per month. For the most part, they all count the same. It is even important to pay items that don’t show on credit like cell phones, insurances, rent, utilities, & medical bills. If they are not paid, it will show up as a collection. Pay these on-time since they may be needed as alternative credit references.
- Pull your credit from all 3 bureaus through www.annualcreditreport.com to make sure that nothing pops up on your credit that could hurt you. Check for names misspelled, wrong addresses, multiple social security numbers, wrong date of birth and others. Most errors are a result of these. So check everything! This is free but you have to pay to see your scores but keep in mind what we said above. These scores are not mortgage credit scores so they could be off a bit. The important thing is that you are making sure that your credit report is accurate prior to application. Then let us decide if you meet mortgage approval credit requirements.
- Credit Inquiry Worthy: Even though credit inquiries do not affect a credit score a lot, it can lower scores if too many in a short period. So make sure that you really want that credit card or loan before giving permission to pull credit. Read more about Why & How You Should Check Your Credit Report Every Year.
- Mortgage lenders look for at least 12 months of credit history on each account to count them as good credit experience. The longer the accounts are open, the better. Lenders like to see a minimum of 12 months reporting on the credit report to count as an acceptable trade line. Lenders generally look for 3 – 4 credit trade lines reporting 12 or more months. This trade line requirement may include on-time rent payments.
- Be wary of only having credit that doesn’t help you so much. Authorized user accounts are very popular today. An “authorized user” account could help a credit score, but mortgage lenders will not count it as the borrower’s account. Authorized users are not required to make payments, so these are not counted by lenders. Deferred student loans may not count as good payment history since no payments are required.
- Foreclosure, short sale, or bankruptcy is not the end of the world. There are many mortgage products that are available once the appropriate time has elapsed. It is important for the buyer to re-establish sufficient credit for at least 12 months.
- Bring it all home by reading How to Have Perfect, Walk on Water, Qualifies For The Best Rate There Is, Credit.
Remaining Articles for First Time Buyers Buying in a Year or Less
We hope that you have found this first article about mortgage approval credit requirements beneficial.
Now you have learned about the mortgage approval credit requirements. Check out the other articles in this Series: I Want to Buy a Home in a Year or Less, Your Roadmap to Get Home.
- Saving for a Down Payment and Emergency Savings – Up to $40,000 in savings tips!
- Creating a Budget to Afford and Qualify for a Mortgage to Purchase
- Best Tips for Paying Rent & Why
- Why Using A Good Realtor is So Important
- Knowing Your Low to No Down Payment Options
- The Last Steps to be Ready for Closing