Of all the elements that make up an approved mortgage, your credit report is probably the most important and misunderstood part of the process. Unlike down payment money and your employment/income, your credit history is much more complex and represents most of your financial behavior during your adult life and therefore, it is hard to “fix” overnight. Traditionally, the best indication of a person’s future financial habits is his/her past financial habits. Lenders use the past credit data to help assess the risk of the borrower defaulting or paying late on the loan.
There are many things you can do to either improve credit “dings” that may appear on your report and avoid decisions that could lead to a drop in your FICO score. Some of the most important things you should know include;
- Do not apply for new credit cards or car loans during the 12 months preceding your mortgage application.
- Keep all your credit card balances between 25% and 50% of their available credit limit. Maxing out your credit cards can reduce your FICO score by 30 to 60 points, even if you are paying on time.
- Never close an old account. A lengthy credit history establishes a higher credit score, so closing an old account can lower your FICO score.
- Avoid paying your bills after the 30 day late deadline. One late payment can drop your FICO score by 100 points.
- If you do have late payments or collections, they will impact your credit score the most if they are 1 to 12 months old, less so if 13 to 24 months old, and even less after they are 2 years old.
- Do not pay off collections that are over 2 years old as doing so will lower your FICO score. If the collection is more than 2 years old, pay it off if possible.