Applying for a Mortgage or Refinance? Don’t Do This

Many borrowers think that closing out one or two credit cards prior to applying for a mortgage will enhance their credit scores and make them more attractive candidates for new loans.

Contrary to the thought that removing credit card spending temptations will favor getting the best loan, lenders look more favorably upon borrowers who keep credit accounts open and resist the urge to use them. The bottom line is that good credit scores are awarded to those who barely use their credit.

There has been extensive analysis by FICO, the firm that is the root of credit score formulas, on the subject of what would be a low-risk borrower. They have concluded that consumers who have access to a lot of credit but use it frugally are the best candidates for loans.

Approximately one-third of your credit score is the result of taking your total debt and dividing it by how much credit you could carry if you used all of your available credit. This is the debt utilization ratio. Financial advisors recommend that you try to keep this ratio under 30%, so keeping cards with zero balances will help this ratio that is so important in determining your FICO score.

When you prepare to get a new loan or refinance, work on paying off your credit cards, but don’t close the accounts. Your best loan terms will come when you can get your FICO score to 760 or higher.

If you do need to close a credit account because of excessive fees and non-use, pay down your other credit at the same time so your debt utilization ratio isn’t impacted. Good payment history on any closed account will follow you for 10 years.

Please give me a call so I can help you analyze your credit report and see where you can make improvements for the best loan terms possible.