Credit Mistakes Title

Managing a credit profile has grown into a daunting task over recent years. And preparing your credit prior to buying a home is especially important to your future as a homeowner.

Related article: How to Prepare Financially before Buying a New Home – 10 Steps

But once they clean up their credit to buy a new home, many fail to continue to maintain it, letting their credit score drop and getting loose with credit.

We’ve put together the 10 most common credit mistakes new homeowners make, and how you can avoid them.

1. Failure to Continue Managing Their Credit Profile

Credit History form

Staying on top of a credit report is very important once a new home is purchased. Many people are exhausted from the process of getting into a home and prefer to take a break from credit management. Yet this mistake can produce far-reaching ramifications.

Steve McLinden of Bankrate, reports that credit scores take a dip for a period of time as mortgage payments gain some history. This can be up to 100 points and typically takes 6 months to 1 year to creep back up. “A mortgage that is honored to the letter is one of the best things a person can have on the credit report. It typically results in a higher credit score than before the home was purchased.”

Fortunately, consumers can receive a free credit report annually with AnnualCreditReport.com or check it free every month at Credit.com. Taking the time to track what’s going on will not only prevent damage, but can also be encouraging should the score be rebounding.

2. Being Late on Mortgage Payments

Mortgage Lender

Unexpected expenses can come up at any given time, but pay attention to your mortgage. Being too late on a mortgage payment involves paying late fees, and a mark on your credit report.

In an article written on Dough Roller, Rob Berger said, “Most creditors won’t report a payment that’s just a few days late. If your payment is less than 30 days late, it probably hasn’t been reported to the credit bureaus yet. But once you hit the 30 day mark, expect your late payment to show up on your credit report. In fact, late payments will be categorized based on how late those payments are: 30 days, 60 days, 90 days, 120 days, 150 days, or charge-off. The more delinquent your payment is, the worse its effect on your credit scores.”

A credit score can be damaged fast, yet it takes anywhere from 9 months to 3 years to get that score to recover.

3. Adding More Debt after the Purchase of a New Home

Home Staging

Every credit decision after the purchase of a home needs serious consideration. With the excitement of owning a home, comes the desire to buy new items for it. Yet any credit card purchases will jeopardize a credit store that is already being challenged by a large mortgage.

Certified Financial Planner Ellen Derrick writes, “A lot of people buy this nice house, and then look at the ratty car sitting in the driveway and think, ‘We better buy a new car.’” Or the new home has a formal living room but no formal living room furniture. It’s a credit mistake to start upgrading right after taking on a mortgage debt. “You don’t want to get yourself into a pile of credit card debt just so you can keep up with the house.”

The best approach is to live in the new home as it is, while building a savings account to make new purchases rather than adding more debt on a credit profile.

4. Not Understanding Credit Utilization

Credit Card Balance

Credit cards with a balance over 50% of the total limit will cause a credit rating to go down. For example, if the credit limit on a card is $1000 and there is an outstanding debt of $600 on the account, this will affect a credit score negatively. Owing $900 on a $1000 limit is much worse.

Simply getting under the 50% mark (preferably 30%) will positively affect a credit score. The lower the debt, the better the credit scores. The safest approach to new credit purchases is to consider if 50% of that purchase can be applied on the first billing cycle. If not, then it’s not worth the purchase and should be seen as being out of one’s budget.

“To keep it strong, aim for using less than half of your available credit lines,” says Sarah Davies, Senior VP of Research and Analytics for VantageScore. If you keep your balance below 50%, your score is not negatively affected, and keeping it below 30% is smart.” (CreditCards.com)

5. Having Too Many Credit Cards

Credit Cards

Less is better when it comes to having credit cards. A wallet full of credit cards is typically a wallet full of debt. Consumers are tempted by introductory low interest rates, but many don’t monitor the increase in interest rates will hit.

Reading the fine print in credit card contracts is crucial and, unfortunately, consumers often don’t want to take the time for that and can get into serious trouble when the rates skyrocket without their knowledge. If closing some of your credit card accounts, be sure they are paid off before doing so.

Andrew Beattie of Investopedia states, “For banks, having many credit cards is a bad sign that usually point to a potential financial crisis in the making – even if they all have zero balance.”

6. Making Minimum Payments on Credit Card Bills

Minimum Payment

Financial planner Daniel Wishnatsky advises, “People don’t realize how difficult it is to pay off loans with a high interest rate. You’re going to be paying it for your next three lifetimes.”

Be sure to check the interest rates on credit cards to make sure eliminating the debt is doable. CreditCards.com has a great online calculator that will answer the question of how long it will take to pay off a debt with minimum payments. Many credit companies already include this information on your bill, so look at it closely.

For those who have already fallen into a credit crisis, there are vast resources on the internet to provide assistance with getting your credit card debt under control: use them.

7. The Effect of Poor Credit on Homeowners Insurance

Home Insurance

Many homeowners are unaware of how many home-related needs are affected by a poor credit report. Homeowners insurance is just one of them.

Insweb.com is an insurance website that specializes in educating consumers about the vast world of insurance. According to Insweb, “The higher a homeowner’s credit score, the lower their risk level. Statistically, homeowners with good credit file fewer claims than homeowners with poor credit. As a result, they’re rewarded with cheaper homeowner’s insurance rates.”

8. Buying a Home without Having a Savings Account

Savings

Many new homeowners are not aware of all the hidden costs as well as financial exposures they will now face. Depending solely on income to manage home expenses is a common mistake.

The best scenario is to have a savings account with money set aside for unanticipated expenses. Even with the best home inspector, there is still the potential for natural disasters, equipment breakdowns, or even personal crisis that can cause a financial meltdown. And things like routine maintenance costs are often not added in as part of a budget, but should be.

Without a savings account, it is common to feel forced into getting a credit card to pay for unforeseen expenses, digging a deeper hole of debt. What if there’s water damage from a pipe bursting, or the sewer gets backed up into the basement? Or what if you lose your job? An emergency savings is crucial.

Dana Drake of Bankrate takes this thought a step further.

“Your lender wants to see that you’re not living paycheck to paycheck. If you have three to five months’ worth of mortgage payments set aside, that makes you a much better loan candidate. And some lenders and backers, like the FHA, will give you a little more latitude on other factors if they see that you have a cash cushion.

“That money will also help you with maintenance and repair issues that come up when you own a home. While repairs are sporadic, items such as a new roof, water heater or other big-ticket items can hit suddenly and hard.” (Chron)

9. Not Studying the Resale Value of Your Home

house for sale

Since a new home is a prized possession, a common credit mistake is not having a true understanding of the real value of a home. In general, homes are not a reliable investment. They are only profitable based on the market and economy at any given time which is difficult to predict.

It is important to do prior research regarding the neighborhood, projections of its profitability, the strength of school zones in the location, and projections of the area value in the future. Will your perfectly quiet neighborhood become home to a new highway or busy shopping mall next year? Is the area prone to natural disasters, or crime?

Many of those looking to purchase a home don’t typically have such things on their list to investigate. Yet such data is critical to understanding the viability of such an investment and considering exposures it can create. A comprehensive look at such issues can be found on Trulia.com.

10. Managing Credit without Understanding It in the First Place

credit report

To say ‘the times they are a changing’ is a huge understatement in the 21st century. Gone are the days of simple credit card statements, simple bill payments, and using cash to pay for items.

This is an era of credit complexities crossing many more financial lines than ever anticipated. Credit mistakes are commonly made by those who make assumptions based on old information. Old information just doesn’t apply in most of the financial world. In this regard, it is important to stay abreast of what changes are taking place to make the best choices when spending money.

The Financial Planning Association is an excellent resource for consumers. People can obtain free educational literature on a variety of personal finance topics and their website even allows consumers to ask financial planning questions, and to receive an answer from an FPA member.

The “Buying a Home” section here at SuperMoney is also a great resource to use when learning about the current issues related to credit management and money. Have a question about credit, or homeownership? Contact us here.

Buying a new home can be exciting. But preparing to buy a new home is more than just deciding how many bedrooms you want or which neighborhood you like the best.

Related article: Should I Buy or Rent a House? The Truth About Home Ownership

Follow these steps to get your finances in order, which will help you qualify for the lowest rate possible for your mortgage and save you money as the homeowner.

1. Save up for a down payment.

Down Payment Mortgage

Ok, let’s get the obvious one out of the way. When you are looking to buy a new home, having some cash to put down is a must. The lower your loan-to-value (loan amount, as compared to the home value), the lower your interest rate.

Having a loan-to-value of less than 80% also helps you avoid things like PMI, private mortgage insurance, which will cost you money every month.

2. Shop around to mortgage lenders.

Mortgage Lender

Make calls to potential lenders to check rates or look online. You can find out what rates each lender has to offer by giving them your general information—not everyone that you talk to needs to pull your credit.

You should be able to get a good idea of the types of programs and rates that a certain lender can offer to you, without going through the entire pre-approval process. This is an important step because rates can fluctuate from one bank or lender to the next.

3. Get your credit checked—but only by one lender.

Credit Score

Once you have decided which lender to go with, give them all of your information and authorize the credit report to be pulled.

The reason that you don’t want to allow every lender you talk with to pull your credit is because too many inquiries can cause your credit score to drop. This is not what you want to do right at the time that you are trying to get approved for a mortgage.

Credit score, along with your debt ratio and the loan amount that you are taking out, as compared to the home’s value, are all used to determine the rate for which you will qualify.

4. Clean up your credit.

Improve Credit Score

If you have a rough credit history and know it, start working on getting old or negative credit items updated or removed. You’ll want to start this several months, or even a year, before you actually plan to purchase a home.

Related article: 15 Ways to Repair Your Credit Score: Expert Tips

Any time that you are trying to get old items removed or updated, you must provide proof that the item has been paid off or settled. Make sure you get a letter from the creditor stating that the debt has been fully satisfied and that you no longer owe.

Once an old account has been paid off, the creditor is supposed to report it to the bureaus, but sometimes this doesn’t happen. Having a letter in writing allows you the ability to send a copy to the credit bureaus yourself to get it updated.

5. Don’t use store credit cards.

Store Credit Card

You may be wondering what this has to do with a mortgage. When you use a store card to make a purchase, even if you only buy something for $30, the minimum payment is probably $25.

When a creditor is looking at your credit report, each minimum payment that is showing up is used to calculate your debt ratio. So if you have a few store cards showing up, that could really throw your DTI (debt-to-income) ratio way off. Most lenders are looking for a debt ratio of 40% or less in order for you to qualify for the lower rates.

6. Don’t make any large purchases.

New Car

You want your finances to look as good as possible when trying to qualify for a mortgage. If you have a car that is paid off that you are currently driving, you may want to wait until after your home loan is finalized to buy a new one.

The additional credit pulls could lower your score and the new payment showing up on your credit report could throw your debt ratio too high. The difference between a 38% DTI and a 42% DTI doesn’t sound like a big deal, but it can make a difference in the rate that you will get.

7. Don’t pay for everything with cash.

Pay Cash

Don’t fall into the “pay cash for everything” trap. So many people think that they are doing themselves a favor by paying cash for everything, so they have no debt. While having no debt is a good thing, it can also work against you.

If you have no debt, that means you probably don’t have much of a credit history. The bank looks at your credit history—and how you have paid off previous loans—in order to qualify you for a mortgage. Lack of creditors reporting to the bureau can mean a low credit score, simply because there is not enough information in your credit history.

If you are currently paying for everything in cash, get one (or two) credit cards—and start using them. You don’t need to rack up a bunch of debt, but use the credit cards to pay for monthly purchases, such as groceries and gas, and then pay them off each month. If you’re worried about debt, try getting a secured credit card instead. These creditors will now report a balance each month to the credit bureaus and also record your payment each month.

8. Find a trusted real estate agent.

real estate agent

A real estate agent isn’t just for selling a home. When you are looking to buy a home, having a real estate agent negotiating for you is important. It doesn’t cost you any extra because if you buy a home that is listed on the multiple listing service (MLS), realtor fees are already built into the cost of the home that you are buying.

So bringing your own agent will allow you to have an agent looking out for your interests in the deal. And when it comes to price negotiations, could save your thousands of dollars.

9. Get a home inspection on your potential home.

Home Inspection

This is different than the appraisal. This is when an actual home inspector comes out to examine your potential new home. This can be invaluable because it will give you peace of mind regarding the structure and condition of the house.

An inspection is important, especially when it is an older home. Sometimes things look good on the surface, but there could be issues that could cost you hundreds, if not thousands, of dollars to fix later. Learn more about what happens during a home inspection at The Money Pit.

10. Research the county records on your potential home.

Online Research

Most areas have county records online now, and since they are public information, anyone can access them. Look up the parcel number/address of the home you want to buy. Look at the tax assessment, and previous transfer (sale) values. This can give you a good idea of what the home is actually worth.

Keep in mind the tax assessed value is usually less than the market value. But finding out what the home sold for previously can give you a good idea of what a current value may be. Also, visit Zillow.com to get a current estimated value of your potential home.

For most people, buying a home and getting a mortgage is the biggest financial decision that they will make, so taking the time to go over your finances and qualifying for the best program possible is paramount.

Don’t rush it. If you need a few extra months to clear up your credit history, or create a credit history, it will be worth it if it helps you qualify for a better program. This is a purchase that you will be paying on for, probably, the next 30 years. So take your time and do it right.

Ready to buy a new home, but not sure if your credit is in good enough shape to qualify you? Preparing your credit to apply for a mortgage and get a loan with a favorable interest rate requires keeping these 10 tips in mind.

Related article: 10 Things To Ask Yourself Before Buying A New Home

1. Get Your Credit Score

fico-credit-score-scale

Facing reality is your first step in preparing your credit for buying a house. To get your credit score for free, try CreditKarma or Mint. Both sites enable you to get your score without charge. If you order your score from both sites and they are different, average out the two numbers to get a more accurate score. If you want to be extra sure of your score and see the number most often used by mortgage lenders, pay for your score at FICO.

Here’s a useful article if you’re surprised by your credit score: 10 Important Things You Have To Know About The Recent FICO Credit Score Changes.

2. Check Your Credit Report

Credit report with score

While your score gives you the specifics, your credit report offers the big picture. The information reflected on your credit report directly affects your score. For instance, it will show if you have any late payments on record and how much of your credit is currently in use.

Get a free credit report for all three major credit bureaus (TransUnion, Equifax and Experian) by visiting AnnualCreditReport.com or from one of these credit reporting sites. Your report will highlight areas in which you need to make improvements.

3. Know Your Credit Score Goal

Credit Score Factors Title

Understanding the ideal credit score range for buying a home helps you know what to aim for regarding your credit. Credit scores range from 300 (very poor) to 850 (excellent).

According to Fannie Mae and Freddie Mac, you generally need a score of at least 620 to qualify to buy a home. This is the minimum score. If your credit falls between 620-699, you’ll pay a higher percentage rate and go through a more rigorous application process than if your score is in the 700s. Scores of 740-750 or above usually qualify for the best interest rates on the market.

4. Examine Your Credit Report for Accuracy

biggest-factors-that-can-affect-my-credit-score

Considering that your score is directly affected by what is on your credit report, it’s important to verify that all of the information on your credit report is accurate. The U.S. Consumer Financial Protection Bureau advises correcting mistakes on your credit report by contacting the credit reporting company that is showing the error as well as the company that is the source of the information.

5. Pay down Credit Card Debt

Credit Card Balance

The lower the percentage of your credit you have in use, the higher your credit score will be. Prepare your credit for buying a new home by paying down your credit card debt as much as possible. Start with the largest balances, concentrating first on those cards that are maxed out or nearly maxed out.

We’ve got some great tips on paying down your credit card debts with How to Pay off Credit Card Balances More Effectively.

6. Avoid Using Paid-Off Credit Cards

closing-credit-card

Once you’ve paid down credit card balances, wait 45 days for the changes to be reflected on your credit report. Also avoid using your credit cards while applying for a mortgage and while your home is in escrow. You want the balances to stay as low as possible during this time.

7. Leave Old Open Credit Lines Alone

Credit Cards

If you have credit lines on your report still showing, despite the fact that you paid them off some time ago and aren’t using them, don’t close them. Leaving them alone is good for your credit, because a big part of determining your credit score and credit worthiness for getting a mortgage loan focuses on how much credit you have versus how much of it is in use. You want a high amount of credit and a low amount of it in use.

8. Diversify Your Credit Report

Bank Loans

In addition to major credit cards, it’s a good idea to have other debt represented on your credit report, such as student loans and car loans. Known as seasoned trade lines, each of these different types of debt should show up on your credit report at least seven to 12 months prior to applying for a mortgage loan.

9. Don’t Open New Credit Lines

Financial Planner

At least six months prior to applying for a mortgage, avoid adding new credit of any kind. Even minor credit additions can diminish your chances of getting a mortgage loan. Except for paying off debt, leave all of your accounts alone during this time.

10. Be Patient, It Won’t Happen Overnight

Mortgage

How long it takes to get your score up to snuff for a mortgage depends on a lot of things. This includes what your score is now, and how much money you have available to pay off current debts. Reaching your financial goals doesn’t happen overnight, but keep moving, saving, and preparing your credit. You’ll reach your goal of buying a new home in no time!