Make Yourself a Better Borrower

Buying a home isn’t a decision you can make overnight. There are things you need to do in advance to ensure success. As far in advance as possible, you have to start laying the groundwork to be approved for a mortgage. That means creating a credit history and making yourself an appealing loan candidate for lenders.

Make Yourself a Good Borrower

• Take care to pay all your bills on time for the next year. Set automatic payments or alerts and make sure you pay all your bills on time. Late payments will reflect negatively on your credit score.
• Lessen existing debt as much as possible. Get the cumulative balance of any existing debt as low as you can. Your total amount of debt and your monthly loan payments play a big part in whether or not you’ll be approved for a mortgage loan.
• Eliminate frivolous debt. Your credit score is affected by how many credit cards you have with open lines of credit. If you have several credit cards with a small amount charged to them, pay them all off, and stop using them. Choose a few go-to cards to charge your expenses on (preferably cards with a high interest rate).
• Hold on to “good” debt. On the flipside, big loans that have been open for a long time are good for your credit. Car loans, student debt, existing mortgages—these are all establishing your trustworthiness as a lender and are improving your credit score.
• Don’t open new lines of credit. If you need to, keep it to a minimum. Opening new lines of credit requires the company to make a credit inquiry. Credit inquiries for credit cards will hurt your credit score—not by much, maybe just 5 points, but if your credit is already not good, these inquiries will add up.
• Don’t take on large debt. If you buy a new car, that will hurt your chances at getting a mortgage. While in the long run, a car loan can benefit your credit score, taking on big debt so close to applying for a mortgage can make your debt-to-income ratio (the amount your bills are per month versus the amount you earn per month) too high and disqualify you for a loan.
• Don’t max out any credit cards. Unless you can pay it all off at once, your credit score will take a hit if you max out your card. Using all your available credit brings your credit utilization ratio (the amount of credit you’ve used versus the amount of credit you have) to 100 percent, which is a red flag to lenders. Ideally, you should keep your credit utilization ratio under 30 percent.