How to Prepare Your Credit for a Mortgage Loan in 2013

It’s never too early to begin thinking about your New Year’s resolutions for 2013.  If one of those resolutions is to buy a home, then now is the right time to begin preparing for perhaps the most cumbersome of all loan types: The home mortgage.

I got the idea to write about this from a question I got on my Facebook page.

Question: John, I’m 24 and I’d like to buy a house in the next six months. The rates are so low right now and my parents are telling me that I may regret missing the unprecedented combination of low rates and competitive home pricing.

I pulled my credit reports last week and was surprised to see my FICO score around 680. All I have are some retail store credit cards and one old collection from when I was in college and forgot to pay a final utility bill after I moved.

I paid the collection in full yesterday, so I’m expecting my score to go up quite a bit. Is there anything else to do to prepare for a mortgage loan?

Validate Your Credit Score

For the sake of clarity, I traded several messages with this Facebook fan of mine and got further details on some issues surrounding her credit.

Her credit score is 680, but it wasn’t her FICO score. To help validate the 680, I asked her to pull her scores from other free sites like CreditSesame and CreditKarma and it looks like she’s in the 680-715 range across the board. Her legit FICO scores will likely be in the same neighborhood.

The two issues she is dealing with are the collection that’s still on her credit report and the fact that all of her retail store cards have balances. The collection is not going to go away simply because she paid it. It will be on her credit file for two more years.

Still, the fact that it’s so old is helpful because as negative items age they lose value and don’t impact your FICO scores as much as they did when they were newer. And, the fact that it’s the only negative item on her credit report is great because she hasn’t exhibited a pattern of negative credit management.

Take Action on Credit Cards

The issue with the retail store cards is actionable — right now. I recognize we’re on the front end of the holiday shopping season and using credit cards to buy gifts is a necessity for some.

The good news is because credit card balance reduction is so actionable, she (and you) can go right ahead and take care of all your holiday shopping on credit cards if you’d like. Just know that you’ll have to pay them off right away if you are planning on going through the pre-qualification process any time soon.

And when those credit cards do get paid off, they’ll need to be shelved during the underwriting process. This will ensure the highest possible FICO scores for a slightly blemished credit report, which should lead to very attractive terms for the new loan.

Shelve Credit Usage for 45 Days

Once you pay off the cards, leave them unused for at least 45 days before you apply. This will ensure the balances on your credit reports will be $0. Sometimes it can take a full billing cycle to update accounts on credit reports.

Paying the cards off 45 days in advance is plenty of lead-time.  You can continue to use your debit, prepaid debit, or gift cards because those don’t show up on your credit reports.

After you’ve applied for the loan (have fun filling out all that paperwork!) you’ll want to make sure your credit reports don’t go through any significant changes while the loan is being underwritten.

Now That You’ve Been Approved….

Just because you’ve been approved for a loan doesn’t mean you’re out of the woods yet.

It’s possible that your credit reports and scores will be pulled again just before your closing date. The purpose is to make sure that nothing has happened with your credit and debt that could cause the lender to change their minds.

Don’t apply for any new credit until AFTER your loan has closed. And, if you want to charge stuff like expensive furniture or a new TV for your new home’s basement, again, wait until the loan has closed.

Taking on new debt can lower your scores and will definitely change your debt-to-income ratios for the worse.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.