If you are considering obtaining financing for a home purchase, then it is imperative that you ensure that you maximize your credit score. As you probably have read in recent years, the process for a loan approval is much more strict that it was years ago prior to the housing collapse. With this said, it is important that buyers become educated on various best practices to increase their credit score. Equally important, common mistakes can quickly reduce any credit score.
- 1. Missing a payment: If you happen to be late on a payment by a day or two, you will likely incur a penalty fee. With this said, an account that becomes delinquent at 30 or more days is reported to the credit bureaus. This may result in a substantial drop in your credit score and may even remain on your credit report for 7 years!
- 2. Using retirement funds to pay for debt: Almost half of Americans say they would not file for bankruptcy no matter how much credit card debt they had, according to a recent study commissioned by NerdWallet. Oftentimes, retirement funds are used to cover the debt. While this may seem admirable, it usually results in an inevitable bankruptcy anyhow. Furthermore, retirement accounts are typically protected during a bankruptcy. Therefore, exhausting one’s retirement funds to cover debts is not advisable.
- 3. Co-signing a loan: While the co-signing on a loan typically has good intent, it can often result in damage. For example, a friend or family may need for you to co-sign on a loan in order for them to build credit. If the co-signing takes place and the primary borrower becomes delinquent on the loan, this will most certainly negatively impact your credit score. Even if the the payments are made on time, remaining on the loan will limit your borrowing capacity in the future.
- 4. Checking your credit: Checking your credit at least annually is a strongly recommended best practice. Similar to going to your dentist for teeth cleanings, keeping an eye on your credit report will help you identify any issues before they become too damaging.
- 5. Opening too many lines of credit: Building a strong credit score is a balancing act. Oftentimes, many people have entirely too many credit cards open at once. This may negatively impact your credit score, thus making it more difficult to obtain a home loan.
In closing, building and maintaining a strong credit score is typically one of the biggest challenges facing home buyers. If you are embarking on a home search, we always recommend getting pre-qualified by a mortgage broker first. Next, it is important that you do not begin opening new lines of credit during this time. For example, this is not the best time to open up a new credit card being offered by your favorite store. Paying attention to these details will greatly improve your chances of being approved for a home loan. In the end, home ownership is one of the most critical factors in wealth accumulation. Not to mention, it truly is The American Dream!