Often, when you start applying for mortgages, the first thing you hear about is the importance of a good credit score. As a general rule of thumb, you need at least a 600 to get most mortgages, but there are some mortgage lenders that work with borrowers with lower scores. However, your score isn’t the only thing mortgage lenders take into account. Once they determine that your score is reasonable, they actually look for a number of different elements on your report.
Judgments, Liens, and Collection Accounts
Traditionally, judgments, liens, and collection accounts are listed on the top of your credit report. If you get your report online, you may see a number of tabs, and these accounts are usually grouped together in a single tab. Mortgage lenders don’t want to see anything in this category.
Ideally, you should pull your credit report before applying for a mortgage, and you should attempt to clean this area up. Liens are a claim to your asset. For instance, if you owe the IRS money, the IRS issues a tax lien. Note that as of July 2018, the credit bureaus have removed tax liens but other liens may show up on your account. Collections are old bills or credit cards that have been sent to collection agencies. That may include an old cable bill that you forgot to pay or seriously delinquent credit card debts.
Judgments are amounts that you have been court ordered to pay. This may include anything from unpaid child support (note that this debt may also show up as a trade line) to old accounts in collections that have gone to a lawyer who took the issue to court. To reduce the effect of these issues, pay these old bills. Ideally, you should pay the whole bill, but if you decide to take a settlement, remember that you have to report savings over $599 as income on your tax return.
Mortgage lenders also look at your trade lines. This refers to credit card accounts, car loans, lines of credit, and similar credit vehicles. Ideally, you want this area to show that you have been paying your bills on time. Mortgage lenders also assess your total debt to income ratio. If you have a lot of debt compared to your income, you may struggle to get a mortgage, even if you have a great credit score.
Mortgage lenders also look at how close revolving debt (credit cards and lines of credit) are to your credit lines. Ideally, you want your cards and lines of credit to be half way or less to their limits. Surprisingly, it actually looks better to have two half charged credit cards than one with a zero balance and another charged to the maximum amount allowed.
Near the bottom of your report, there is a section that shows credit inquiries. Checking your own credit score doesn’t affect this section, but if you’re recently gone out and applied for a lot of loans and credit cards, that will reflect poorly on your situation. Don’t apply for additional lines of credit until after you have the mortgage and are comfortably in your home, and even then, always remember to apply for and use credit very carefully.
If you have additional questions, you should connect with a lender directly. At BrightPath, our mortgage lenders who can help you through the process of getting into a beautiful new home. To learn more, contact us today.