Credit obstacles that could keep you from buying a home
With interest rates still relatively low and lenders easing their restrictions on borrowing, the spring and summer season could be a great time to buy a home of your very own. Getting your credit in tip-top shape before you start shopping around for a mortgage loan is definitely a must and doing that begins with identifying any potential problems or trouble spots.
While things like late payments and collection accounts are the most damaging to your credit, there are some smaller things that could stand in the way when you're aiming to become a homeowner.
Click ahead to see four obstacles to beware of.
You have student loans in deferment
If you're one of the estimated 40 million Americans who took out loans to pay for your education, they could work against you when you're trying to qualify for a mortgage. When you have multiple loans in deferment status showing up on your credit report, it's a little harder for lenders to gauge what your actual financial obligations are.
Typically, mortgage companies want to see that your total monthly debt payments are not more than 28 to 44 percent of your income, but if you're not paying anything toward the loans, they may substitute an estimate to calculate your debt-to-income ratio. If the figure they use is higher than what you'll actually be paying once the loans are out of deferment, this could skew the final numbers up, making it appear that you can't really afford a mortgage.
You’re disputing something on your report
When an error or inaccuracy shows up on your credit history, you have the right to initiate a dispute with the reporting agency. If the credit bureau verifies that the information must be corrected or removed, it can improve your score but at the same time, it may hurt your chances of buying a home.
Lenders may be concerned that if you're disputing multiple accounts, it's a reflection of your ability to manage your financial responsibilities. In that scenario, it's possible that they may not feel comfortable lending you a huge sum of money. If you do have open disputes on your credit, your best course of action is to resolve them before applying for a mortgage. Providing a detailed written explanation of the dispute and the outcome to your lender can also put any fears they may have about your credit-worthiness to rest.
You’ve recently applied for multiple lines of credit
While inquiries for new credit only count toward a small percentage of your credit score, it's not a good idea to open up a bunch of credit cards or take out personal loans immediately prior to seeking a mortgage. Applying for multiple new accounts sends the signal that you may be trying to juggle your obligations, which isn't going to earn you any points in a lender's eyes.
The only exception is if you're comparing loan rates with multiple lenders. Under the FICO scoring model, multiple credit inquiries for mortgage loans made within the same 45-day period count as one for scoring purposes. If you do all of your mortgage shopping within a 30-day window, none of those inquiries will have an impact on your score.
You don’t have any credit at all
Building good credit from an early age is vital, but many millennials shy away from using credit cards completely. The result is that they have virtually no credit history or score to speak of, so when they're finally ready to buy a home, the bank has nothing to go on to determine their level of risk.
A credit card can be the easiest way to establish a credit history and using it responsibly is key. Keeping what you charge to a minimum and paying the balance off in full each month shows lenders that you're responsible with your money, which may make them feel more inclined to help you achieve your dream of home ownership.