Future Homeowners: Don't Let Credit Traps Ding Your Good Scores

If your credit score currently ranges from okay to excellent, it's important to do everything possible to prevent it from slipping downward, especially if you plan to purchase a home soon. Getting and maintaining a solid rating is much more important than most think. Not only does the numerical score impact your chances of getting credit, but it also has a profound influence on the ability to purchase a home, rent a car, or buy a small business. Plus, insurance companies use the number as a part of their math equations for rate setting.

The best approach for protecting your good score before starting to shop for a new home is to avoid falling into traps that have the potential to lower it. In the digital marketplace and fast-paced modern economy, consumers need to be able to recognize the most common credit traps to stay far away from them. What are the pitfalls that most frequently victimize people of all income categories? Bankruptcy is one, but others include reporting errors, having many cards, cosigning on someone's student loan, refinancing an automobile loan, paying bills late, and more. Review the following points about the factors that can imperil your chances of getting approved for a mortgage.

Errors on Official Bureau Reports

Mistakes by Experian, TransUnion, and Equifax happen frequently, especially for consumers who have common names. Even for those whose names are on the unique side, errors show up from time to time. The concern is with how the misreported data can negatively affect your scores. It doesn't take much. Keep in mind that one or more late payments, a charge-off, or a high-balance account can decrease ratings substantially. If those negatives don't belong to you, it's critical to contact the bureaus and request corrections.

Utilize the annual free report law and comb through each document carefully. If you have difficulty comprehending the jargon, use an online resource or ask a friend for help. Once you identify an error, follow the organization's directions about how to fix mistakes. Be sure to provide as much written documentation as possible when responding. A single mistake can sink your chance of winning approval on a mortgage application.

Cosigning on a Student Loan

Purchasing any type of property or real estate can be a tricky proposition. Not only does the process entail a great deal of paperwork, but it can take several months from start to finish. One thing that slows it down is a glitch in the applicant's creditworthiness. If you cosigned on someone's college loan when they had no other way to pay for an education, you did a good deed.

Millions of parents cosign for their children at the start of every academic year. However, cosigning is not always the smartest move because it can impact a person's ability to get a mortgage. Savvy consumers should begin by reviewing an informative guide that walks through all the ways that cosigning could complicate the approval process for a future homeowner's chances of obtaining a loan at a decent rate of interest. A college education is an indispensable part of a person's career success, so it's imperative to learn all the facts before adding your signature to another person's loan application. There's no reason to harm your possibility of becoming a homeowner.

Recent Bankruptcy

Lenders have different policies about how to handle bankruptcies on consumer loan applications. For Chapter 7 cases, consumers usually must wait four years before they can borrow for a real estate purchase via a conventional loan. For debt restructuring, or Chapter 13 bankruptcies, the wait time is a bit shorter. It's nearly impossible to get funds while the case is ongoing, which runs either three or five years. After the Chapter 13 discharge, the wait is only two additional years. However, those currently in restructuring bankruptcy, Chapter 13, can get FHA and some other kinds of mortgages as soon as one year after the filing date.

Cancelling Cards or Applying For Too Many

Card cancellations might seem like a practical approach to financial planning but they can come back to haunt individuals who do so while there are still balances pending. Even when the cardholder owes nothing, canceling or closing accounts can impact your ability to purchase real estate because the action lowers the total available spending limit. Mathematically, that translates into higher usage of available credit. Applying for multiple cards in a short period of time signals financial desperation to prospective lenders. Additionally, if each issuer performs a hard pull on your file, the negative damage can add up quickly.

Collections

If you owe money and stop making payments on the agreement, lenders can hire an agency to try and get the funds from you through legal action. Such activity can stay on reports for as long as seven years, during which time it has a powerful effect on your ability to buy a house. Recent collection activity is particularly harmful, while older accounts in collections don't have near the impact of fresh ones. The logic is that consumers with recent financial trouble are a much worse risk for lenders than consumers who had some difficulty paying their bills in the distant past.

Settlement of Debt

Settlement agreements can be a quick way to get out from under a burden, but they come with a cost. The activity shows up on bureau reports and can reduce ratings substantially. In a similar way, those who opt to get debt consolidation loans usually experience lower scores after the new agreement takes effect. But in the long run, many consumers discover that a consolidation helps them get back on their feet and reestablish a solid financial record.

Missed or Late Bill Payments

The reality of the reporting system can seem unfair at times. That's the case with late payments. Individuals who have one or more accounts with 30-day or 60-day delinquencies can suffer from large point drops in their scores. Even worse is that all those late payments hang around on reports for as long as seven years, thus serving as constant notice that the consumer poses a risk of non-payment on future debts.

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