Your personal finances are a critical part of securing a mortgage. One important part of your finances is your credit; a higher credit score can lead to a lower cost mortgage.
It’s important to have open lines of credit with no debt, which can increase your credit score. Lenders typically look for at least three open trade lines, such as a Mastercard or department store credit card. Paying your credit card bills on time leaves your credit report with “paid current” for each line of credit and no derogatory items or delinquencies. It’s also critical to show a consistent payment history over time, so keep your credit accounts long-term.
On the other hand, payment obligations can reduce your ability to qualify for the mortgage amount you want. If you carry a balance on your credit cards, the minimum monthly payment is reported on your credit report and will be subtracted from the amount a lender will allow you to borrow. Lenders want to see cash flow after expenses, not payments owed. Late payments also negatively impact your mortgage with a low credit score, which may translate into a higher mortgage rate or disqualify you completely.
Your history with credit cards can help or hinder your mortgage process. Before seeking a mortgage, make sure you’ve checked your own credit report. You can request a free credit report each year from the three consumer credit reporting agencies (Equifax, Experian, and TransUnion) at AnnualCreditReport.com. Inspect your credit report for errors, potential fraud, and areas for improvement.
Make every effort to ensure that your credit report shows minimal or no credit card delinquencies for the 12 months before your mortgage search. If you pay your credit card bills in full each month, it might help to have your lender pull your credit report after your credit card companies report to the credit bureaus. Another strategy is to consolidate debt from many cards to fewer cards to reduce your minimum payment obligation.
Keep your credit score high to ensure the lowest cost mortgage.