If you're in the market for a new home, you'll likely need to take out a mortgage. Applying for a mortgage is a major financial decision, so it's important to avoid making mistakes.
Here are three credit mistakes you should avoid when applying for a mortgage.
Failure to Check Your Credit Report Beforehand
When you apply for a mortgage, your lender may order a credit report to help assess your creditworthiness. This report could contain information about your credit history, including any late payments or collections accounts. If you fail to check your credit report beforehand, you may be surprised to find negative information that can damage your chances of getting approved for a loan.
By checking your credit report in advance, you can identify any potential red flags and take steps to correct them. For example, if you find an error on your report, you can dispute it with the credit bureau.
Additionally, if you have any delinquent accounts, you can try to negotiate with your creditors to have them removed from your report. Taking these steps can improve your chances of getting approved for a mortgage.
Applying for New Credit Cards or Loans
When you apply for a mortgage, your lender will check your credit score to determine your creditworthiness. A critical factor in your credit score is your credit utilization ratio. This ratio measures the amount of revolving credit you're using compared to the total amount of available credit.
If you apply for new credit cards or loans before applying for a mortgage, your credit utilization ratio could increase. This move, in turn, could lower your credit score and make it more difficult to get approved for a mortgage.
You should avoid applying for new credit cards or loans before applying for a mortgage. If you need to improve your credit utilization ratio, you can pay down your existing debt.
You can help yourself get approved for a mortgage by avoiding new credit applications.
Co-Signing a Loan
Co-signing for someone else is a mistake during your mortgage application for a few reasons. By co-signing, you take on the same financial responsibility for the mortgage as the primary borrower. If they miss payments or default on the loan, your credit will be impacted as well.
Additionally, co-signing can limit your own borrowing power in the future. Lenders could factor in any outstanding debts when considering you for a loan. So having a mortgage co-signed for someone else may increase the amount of debt that you appear to owe. For all these reasons, it's best to avoid co-signing for someone else's mortgage altogether.
A mortgage broker—such as Cornerstone Residential Mortgage—can help you avoid making these common mistakes during the mortgage application process. By working with a mortgage broker, you can get expert advice and guidance to make the process as smooth and stress-free as possible.