Mortgage companies want to see your credit report and they want to see established credit. For some, the first time a credit report is pulled is at the mortgage company – that may not work. It's almost impossible to get a mortgage without having a credit history. If you have credit or have been turned down several times for credit (either credit cards or a car loan), it may be time to look at your report and see if there are things on it that should not be there.
Here are some red flags that lenders look for:
- Credit opened too often – if you open several accounts within a short time, it could look like desperation to a lender – what is going on? Is there a reason you need the extra credit? Are you going to have trouble making the payments?
- Settled Accounts – if you sell your home as a short sale, it is reported by the credit bureaus as settled for less than the full balance. That is looked at by lenders negatively – it is similar to a foreclosure.
- Someone else's debt – if you co-sign for someone else, that debt becomes yours. So if you are going to qualify for a mortgage, we are going to use that debt against you. If that person quits making the payments, you are responsible, if they make them late, there are late payments on your credit report. I had a client whose score dropped over 100 points due to late payments on co-signed loans. Be careful if you are going to co-sign for someone else.
- Paying the minimum payments due – this can be looked at negatively. It could be a sign that you are in financial trouble and may have problems making a new house payment.
- Too many inquiries – this signals that you are looking for credit. It can also lower your credit score. If you are shopping for a car or mortgage, try to do it within a 30 day window. That way the inquiries should be looked at as one inquiry. This does not apply for credit cards- each credit card inquiry will lower your score.
- Cash advances – this hurts you as it will automatically lower your available credit, which will lower your score. There are several credit scoring models that also lower your score if you are pulling cash out of your credit cards. They look at it as robbing Peter to pay Paul.
Look over your credit report, if you see mistakes, send a letter to the credit bureau asking them to fix the mistake. Call the lender and ask them to correct the mistake. It may take some time to fix, but it's worth it! The lower your credit score, the higher the interest rate on new loans. It will save you money in the long run.