Ok, your buying your home, you have applied for a mortgage and you have been pre-approved!
Great, your home free, nothing can go wrong now, right?
Well not exactly, depending on how long it is until you take possession of your house (the closing date), you still need to keep your financial affairs in order.
The biggest reason for this is, your bank or lender may do another credit check before you take possession of your home. Most lenders want the credit bureau that they have on file to be dated within 30 days of the closing date.
So if you applied for your mortgage before you started shopping for a home, and the closing date for your new purchase is 45 – 90 days in the future, you can bet your last dollar that the bank will do another credit check, and the consequences of any changes to your financial position could mean your mortgage may need to be altered, you may be asked for a larger down payment or it could be flat out declined.
So to avoid any headaches, lost sleep and unnecessary stress just follow these simple tips and you will be just fine.
- DON’T APPLY FOR NEW CREDIT OF ANY KIND
- DON’T PAY OFF COLLECTIONS OR CHARGE-OFFS
- DON’T CLOSE CREDIT CARD ACCOUNTS WITH ZERO BALANCES
- DON’T MAX OUT OR OVER-CHARGE YOUR CREDIT CARD ACCOUNTS
- DON’T CONSOLIDATE YOUR DEBT ONTO 1 OR 2 CREDIT CARDS
- DON’T DO ANYTHING TO CAUSE A RED FLAG TO BE RAISED BY THE SCORING SYSTEM
- DO JOIN A CREDIT WATCH PROGRAM
- DO STAY CURRENT ON EXISTING ACCOUNTS
- DO CONTINUE TO USE YOUR CREDIT AS NORMAL
- DO CALL YOUR MORTGAGE BROKER
DON’T APPLY FOR NEW CREDIT OF ANY KIND
This includes 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.
This also includes car loans, you may be surprised at how many people get in the spending mode and after finding a home, they go out and buy a new car.
If the lender finds out, they will incorporate your new car payment into the application and this new payment will lower the maximum mortgage you qualify for.
Not a big deal if you have lots of room between the maximum mortgage you qualify for and the value of the home you are buying. However, a massive deal if there is not much room, and even worse if the new maximum mortgage is lower than the value of your new home.
Just don’t add any new debt during the home buying process unless you talk to your mortgage broker first.
DON’T PAY OFF COLLECTIONS OR CHARGE-OFFS
This may sound counter-intuitive, but paying collections will decrease your credit score immediately due to the date of last activity becoming recent.
So wait for your mortgage broker to instruct you when to pay off the collection, follow their guidance and they will help to ensure that it will not impact the mortgage process.
Don’t get me wrong the bank will very likely ask you to pay it off prior to them giving you a mortgage, but its the timing that’s important.
Bonus Tip: Make sure you confirm the debt is yours, and try to get the creditor to give you a letter of deletion.
DON’T CLOSE CREDIT CARD ACCOUNTS WITH ZERO BALANCES
If you close a credit card, line of credit or Store accounts with a zero balance it could cause your utilization ratio to increase. Debt Utilization is calculated by dividing the amount you owe by the amount you have available, and it is a crucial ratio to the bank and your credit score.
|Amount Owing||Credit Limit|
Utilization Ratio = 6.7%
After closing your 2 Accounts with zeros balances your ratio jumps to 20%. This is a simple example, but I hope you can see that it is easy to negatively impact this ratio.
Bonus Tip – Change any unwanted credit cards to a no-fee option instead, the rate may be higher, but honestly if you’re not going to use the card don’t worry about the rate. Just leave the card in place and let it help lower your utilization ratio.
Plus, closing a card will affect other factors in the score such as length of credit history, keeping your cards open shows great stability over longer periods of time.
DON’T MAX OUT OR OVER-CHARGE 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 during the loan process. If you decide to pay down balances, do it across the board – divide the amount of the extra payment across all your cards or choose the card with the highest utilization ratio and bring it into line with your other cards.
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 for high utilization. If you want to save money on credit card interest rates, wait until after closing.
DON’T DO ANYTHING TO 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 mortgage process, the better.
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.
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. They are also a great way to detect fraudulent transactions and identity theft.
Don’t worry, when you use this service to pull/check your own reports, you don’t get dinged at all, there are no negative consequences for these type of programs.
DO STAY CURRENT ON EXISTING ACCOUNTS
This one may sound obvious, but it still needs to be said. One 30-day late can cost you anywhere from 30-75, and CMHC has a requirement that you have no missed payments within the past 12 months, so please keep your credit clean!
DO CONTINUE TO USE YOUR CREDIT AS NORMAL
Don’t worry, too much! If you are pre-approved feel free to continue to use your credit as you normally would. Use your card, make your payments, and keep your balance low!
DO CALL YOUR MORTGAGE BROKER
If you have any questions, call your Mortgage Broker! We see tonnes of credit reports and we can likely give you some straight forward advice on almost any credit situation, trust me, I have seen it all.