Fives do’s:
1. Make loan and other debt payments on time, especially over the months leading up to the filing of your mortgage application. Every 30-, 60- or 90-day delinquency on a loan or credit card is going to reduce the credit score the lender ends up considering as part of the loan file. That score, in turn, will determine how good a loan you get — if you get one at all.
2. If something has to be missed, miss the credit card payment first, followed by the payment on any installment loan you might have and finally, the payment for an existing mortgage. That’s because credit scoring systems look at the performance of similar loans first when deciding what type of score to assign.
3. Consider paying off more debt and putting down a smaller amount at closing. The move leaves borrowers with larger mortgages, but it will allow them to replace non tax-deductible, high-interest rate debt with lower-rate mortgage debt that features deductible interest.
4. Get the mortgage first if multiple financial obligations are going to pop up in the near future. Numerous credit inquiries, such as new applications for credit cards, can hurt a borrower’s credit score, especially if they’re filed in the months prior to the home loan review process.
5. Increase the size of the down payment you’re able to make by saving as much as possible, as often as possible. Evaluate money market or other accounts that offer reasonable rates of return, automatic payroll deductions or other financial incentives to save.
Five don’ts:
1. Don’t make any big purchases over the next couple of months. It makes less money available for the down payment and it might require you to get yet another loan.
2. Lenders consider what’s known in the industry as “payment shock” when approving loans. Somebody who goes from a relatively small monthly housing payment to a huge one either won’t qualify for a mortgage or will end up having to cover too much loan with too little money.
3. Don’t just get pre-qualified for a mortgage, get pre-approved. Home buyers must allow their lenders to pull credit reports, check debt-to-income ratios and perform other underwriting steps. But that puts a borrower much closer to obtaining a loan and locking in a rate and term.
4. Don’t forget what kind of money personality you have when getting a mortgage. By taking out a 30-year fixed rate loan rather than a 15-year mortgage and investing the money saved on monthly payments, you might earn a higher return on your money in the long run.
5. Don’t forget that homeownership brings with it many burdens. The cost of defaulting on a loan is much greater than the penalty of missing a rent payment.