Top 10 Credit Dos and Don’ts

Nothing is more exciting to me than to hand over the keys to a brand new (or at least new to the buyers) home to a family that is purchasing their first home. For many, it is the realization of a dream that seemed to always be just around the corner, but has now finally arrived.    

Home ownership is a journey that can be filled with many challenges, and it is most definitely a process. The key to success is making sure that you fully understand the challenges, are aware of and have a good understanding of each step, and most importantly have sound counsel to walk you through this process that can be filled with many turns and unexpected surprises that only experience can help you avoid. 

This journey will begin with the mortgage application and preliminary credit check. You will be ultimately be asked to provide a mountain of documentation, and sign disclosures and other paperwork that, when all stacked together, looks like a trade bill instead of a real estate transaction; but get used to it. It’s part of the initiation into home ownership.  I will talk more about that in another blog.  But for now, here are some helpful tips to avoid the credit mistakes that many borrowers make during the loan process:

1.       DON’T APPLY FOR NEW CREDIT OF ANY KIND.  Including those “You have been pre-approved” credit card invitations that you receive in the mail.  Every time that you have your credit pulled by a potential creditor or lender, you lose points from your credit score immediately.  Depending on the elements in your current credit report, you could lose anywhere from 2-50 points for one hard inquiry.

2.       DON’T PAY OFF COLLECTIONS OR CHARGE OFFS during the loan process.  Paying collections will decrease the credit score immediately due to the date of last activity becoming recent.  If you want to pay off old accounts, do it through escrow, and make sure that 1) you validate that the debt is yours, and 2) that the creditor agrees to give you a letter of deletion.

3.       DON’T CLOSE CREDIT CARD ACCOUNTS.  If you close a credit card account it will appear to the FICO that your debt ratio has gone up.  Also, closing a card will affect other factors in the score such as length of credit history.  If you have to close a credit card account, do it after closing, and make sure it is a more recent account.

4.       DON’T MAX OUT OR OVER CHARGE ON YOUR CREDIT CARD ACCOUNTS.  This is the fastest way to bring your score down 50-100 points immediately.  Try to keep your credit card balances below 30% of their available limit at all times during the loan process.  If you decide to pay down balances, do it across the board.  Meaning, make an extra payment on all of your cards at the same time. 

5.       DON’T CONSOLIDATE YOUR DEBT ONTO 1 OR 2 CREDIT CARDS.  It seems like it would be the smart thing to do, however, when you consolidate all of your debt onto one card, it appears that you are maxed out on that card, and the system will penalize you as mentioned above in 4.  If you want to save money on credit card interest rates, wait until after closing.

6.       DON’T DO ANYTHING THAT WILL CAUSE A RED FLAG TO BE RAISED BY THE SCORING SYSTEM.  This would include adding new accounts, co-signing on a loan, changing your name or address with the bureaus.  The less activity on your reports during the loan process, the better.

7.       DO JOIN A CREDIT WATCH PROGRAM.  If you join a credit watch program, you can check your reports weekly, or even daily depending on the program you select.  (When you pull your own reports, you don’t get dinged for a hard inquiry.)  This way, if something does show up on your reports that has caused your score to go down, you’ll know it immediately, and you may be able to take care of the problem before closing. 

8.       DO STAY CURRENT ON EXISTING ACCOUNTS.  Like your mortgage and car payments.  One 30-day late can cost you anywhere from 30-75. If you pay your balance off each month, make sure that your payment posts at least a day before the due date. When the system does its monthly run on that due date, you will appear to have a zero balance. If you are making payments, try to pay more than the minimum.

9.       DO CONTINUE TO USE YOUR CREDIT AS NORMAL.  Red Flags are raised easily with the scoring system.  If it appears that you are changing your pattern, it will raise a red flag, and your score could go down.

10.    DO CALL YOUR LOAN OFFICER OR BROKER if you receive something in the mail from a creditor or collection agency that you believe may affect your score during the loan process.  Your loan officer may be able to supply you with the resources you need to stop any derogatory reporting to the bureaus.

Looking for real estate services? If you, or a friend or relative is looking for a new home, commercial building or lease, have them give me a call at (714) 584-5509, or send me an email at frank@resusa.org. There are a variety of listed and unlisted opportunities for investors and first time home buyers alike. Let me know how I can help.