Lenders don’t like surprises when it comes to mortgage applicants. And when it comes to applying for a mortgage or looking to refinance, you don’t want any, either.
Yet many people forget to pull their credit report before they go house hunting—or they do it at the last minute—and they don’t know how to handle a poor credit score or a pockmarked report.
If there are any problems on your report, you’ll want to fix them beforehand and be prepared to explain the ones that stick around. Here are five tips on how to handle your credit and your credit report when it’s time to buy a home.
1. Don’t lie or hide the truth
Most people instinctively try to hide or shy away from bad news. Don’t do this with your lender. It’s basically impossible to hide bad news from lenders forever, and when they find out, they might not lend you money. Honesty is important, and be sure to explain any questionable financial issues that may come up during the underwriting process.
2. Don’t mess with your credit
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Continue making on-time payments for all your bills and do not take out any new loans. Keep your credit card utilization at a maximum of 30% of your limit. Don’t open any new lines of credit, either—you don’t want your lender to think you’re ready to take on more debt on top of the loan.
3. Dispute errors
Get a free copy of your credit report and review it. Make sure any negative items are accurate, and if not, dispute them. This can be done online, but you can also inquire by mail.
4. Wait, if necessary
Whatever negative items that still exist will affect your score less the more time passes. The more recent the problem, the more your score will drop. But as long as you don’t accrue new negatives, like continual late payments, your score will go up again. For example, a collection will stay on your report for seven years, but it will weigh much less after five years than after six months.
You have a better shot at getting a good loan the further away you are from the time of the credit reporting incident. If your score is riddled with negatives from several years ago, be prepared to explain what happened and how you corrected it. If you have too many issues from the not-so-distant past, you might be better off waiting. Go for a pre-approval to see if you need to hang back.
5. Show responsibility with a mix of credit
Your report also needs to show that you can handle paying debts. Lenders want to see that you are actively handling a mix of credit, like installment loans and revolving credit. These lines of credit should be at least a year old—the longer the better. Try to anticipate this—don’t open a different line of credit right before buying a house. But if you need to repair credit for a year, adding a different type of credit and handling it properly can slightly boost your score.