Buying a house can be both an exciting and simultaneously stressful experience.

One
reason the home buying process tends to be so stressful for many consumers —
besides the fact that it’s probably the biggest purchase you’ll ever make — is the
rigorous qualification process involved in getting approved for a mortgage.

If you’re preparing for a mortgage application, it is important to understand that

qualifying for a home loan is a very different process than when you apply for most
other types of credit accounts. Here are two important differences when it comes to
qualifying for a mortgage versus other loans:

Difference #1: Lenders Look at All Three Credit Reports and Multiple Credit Scores
The biggest difference between applying for a mortgage and applying for just about
any other type of financing is that, with a mortgage application, all three of your
credit reports and three of your credit scores will be under the microscope.

When you apply for other types of financing (e.g., credit cards, auto loans,
personal loans), the lender will typically only review one of your credit reports
and one your scores.

Since three of your credit reports and scores are reviewed during a mortgage
application, this means that a derogatory item, especially a public record or
collection account with a large outstanding balance, could potentially put the
brakes on your mortgage application — even if the offending item is only present on
a single credit report.

If you were applying for an auto loan, you might still be able to get by and
qualify for financing if you had an outstanding default that appeared on only one
of your credit reports (one that wasn’t checked by the lender during your
application). This isn’t the case when you apply for a mortgage loan. There are no
secrets.

Difference #2: Just Because You’re Initially
Off the Hook
When you initially apply for your home loan,
from your lender if your credit and finances
popular opinion, a preapproval letter is not
Approved Doesn’t Mean Your Credit Is
you may receive a “preapproval” letter
are up to par. Yet, contrary to
actually a guarantee of a loan.

Of course, it’s still wise to seek preapproval from a lender, because doing so will
make realtors more willing to work with you and could make sellers more inclined to
take your offer seriously. But you should remember that simply because you and your
credit passed a lender’s initial test does not mean that the lender is 100%
committed to giving you the home loan once you settle on a property.

Your lender will have checked your credit reports and scores prior to issuing your
initial preapproval letter. However, even though your credit was checked at the
beginning of the loan application process, that doesn’t mean your credit won’t be
checked again later.

In fact, since the home loan closing process commonly takes 30, 60, or even 90
days, many lenders require a final credit check prior to closing to make sure your
credit hasn’t undergone any changes in that time that would increase your level of
risk.

Because your mortgage lender is likely to check your credit again prior to closing,
it’s important to avoid making any mistakes that could impact your credit scores or
increase your debt-to-income ratio (DTI).

This means that applying for new credit, opening new accounts, or running up a
higher balance on any of your credit card accounts needs to be completely off
limits until after closing.

You should avoid any of the aforementioned changes in your credit reports unless
you want to risk the possibility of a lender delaying your loan closing, or even
deciding to cancel the closing altogether.

The bottom line: Once you make your initial application for a mortgage, don’t do
anything to your credit until you have the keys to the house in your hands.

Are you planning to buy a new home this year? Unless you’ve recently won the
lottery or can otherwise afford to pay in cash, it’s probably time to start
thinking about how to prepare your credit for an upcoming mortgage application.

The condition of your credit reports and scores is never more important than when
you’re preparing to apply for a new home loan. A mediocre credit score can cost you
tens of thousands of dollars over the life of a loan. Even if your credit is
already in decent shape, you could still potentially earn a better rate and save
money each month by working to improve your credit before applying for a mortgage.

Don’t Go Blindly Into Your Application

First things first: You need to know what is currently appearing on all three of
your credit reports prior to your loan application in order to avoid any unpleasant
surprises. The good news is that checking your credit reports is easy and free. You
can claim a free copy of your three credit reports once every 12 months online at
AnnualCreditReport.com.

Once you’ve pulled your reports, it’s time to review them in careful detail. Errors
on credit reports are not uncommon and it’s ultimately your responsibility to
monitor your reports with all three credit bureaus (Equifax, TransUnion, and
Experian) to ensure that they are indeed accurate. The only way to effectively
monitor your credit reports for errors is to routinely check them.

If you do discover an item on your credit reports that doesn’t belong there, or if
you find other incorrect information, you have the right to dispute those issues
with the credit bureaus directly. You can submit disputes completely free of
charge, or you can hire a reputable credit repair company to take care of the
legwork for you (for a fee).

Related: How to Dispute Errors on Your Credit Report

Which Balances You Should Pay Down?
Sometimes paying down the balances on your accounts can have a positive impact on
your credit scores as well. However, all balances are not created equal when it
comes to credit scoring. Credit card balance reduction is great, installment loan
balance reduction isn’t so helpful.

Typically the most actionable way to improve your credit scores is to lower or,
better yet, to completely pay off your credit card balances. A sizable one-third of
your FICO and VantageScore credit score is largely based on your credit card
utilization, also known as revolving utilization. The more of your credit limit you
tap, the worse the impact will be on your credit scores. For this reason, paying
down credit card balances is very likely to begin moving your credit scores upward,
and quickly.

Paying down the balances on other types of accounts will not have the same positive
credit score impact as paying down a credit card. For example, you could pay off a
$5,000 balance on your auto loan or a similar balance on a maxed-out credit card,
and you would almost certainly see a much larger score benefit from paying off the
credit card account. In fact, paying off an auto loan might not help your scores at
all.
If you have certain derogatory items present on your credit reports (collections,
judgments, tax liens, etc.), your lender may also need these to be paid prior to
closing. However, the benefit of paying off the balances on your derogatory items,
while tangible, won’t be as profound as you may think.