Before buying a home or refinancing your mortgage, get your credit in shape. Here are five moves sure to mess up your credit.
- Ignoring your credit reports.
- Closing credit card accounts.
- Getting rid of HELOC.
- Getting in over your head.
- Switching jobs.
1. Ignoring your credit reports
The key to getting the best mortgage rate is good credit. A 2004 study by the U.S. PIRG, the federation of state Public Interest Research Groups, found that one in four adults have serious errors on their credit reports. Not small errors either. 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. Use Bankrate’s work sheet to assist you.
2. Closing credit card accounts
While paying down your credit card balances will improve your financial picture, this is not the time to close credit accounts because reducing the amount of credit available to you can actually lower your credit score. “Don’t assume you should just get rid of it,” says Pat Vredevoogd Combs, a practicing residential broker in Grand Rapids, Mich., and president of the National Association of Realtors.
3. Getting rid of HELOC
If you already own a home and have an existing home equity line of credit, or HELOC, Combs recommends that you not get rid of it in preparation for a new home purchase. “I think you ought to leave it alone. Sometimes buyers are going to need it; they can use it as an easy bridge loan (to cover the down payment temporarily until you sell the old home) so they don’t have to go through the trouble of getting one.”
4. Getting in over your head
There is a difference between the maximum payment a borrower can qualify for (which can sometimes be surprisingly high) and the amount you can comfortably afford, says Combs. “Each person has to know the difference in his own mind,” she says. “If you’re just getting by with your current rent payment, and the lender says you can qualify for more, give it some thought.”
5. Switching 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.
How about you? Are you concerned about your mortgage? Pleased with the one you have?
Ready to buy? Share your story.