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Mortgage Basics

How Being an Authorized User Affects Mortgage Approval

Being an authorized user on another person's credit card account could have an effect when you apply for a mortgage, primarily because it shows up as a tradeline on your credit report along with your own credit card and loan accounts.

As a result, information from your authorized-user account can be included when determining your credit score and the lender's underwriting process. And that's not always a good thing.

Understanding the Mortgage Process

When you apply for a mortgage loan, lenders look at several different factors to determine your creditworthiness, including your income and expenses, existing debt, credit report and credit scores.

Your credit history is a key component of this process because it gives lenders a good idea of how likely you are to make your payments on time. A mortgage loan is a big financial commitment for the borrower and lender alike, so lenders may be stricter than you might see with other loan types. They'll look closely at your credit reports and scores to find out how you've handled various credit products, such as credit cards, auto loans and the like. Your payment history is the biggest factor in your credit scores and in lenders' assessment of your responsibility with credit.

When you begin looking for a mortgage loan, you'll start with a preapproval. In this stage of the mortgage process, lenders will review your credit and financial information and give you an idea of your chances of getting approved and how much you might qualify for.

Then once you find a home, you'll continue with an official mortgage application. It's best to get preapproval with several lenders so you can compare rates and terms. At this point, the lender you got preapproved with will run your credit again to see if anything has changed. They typically also do this shortly before closing on the loan.

How Being an Authorized User May Impact Getting a Mortgage

Being an authorized user can help improve your credit scores, especially if the account has a positive payment history. When it comes time to apply for a mortgage, however, an authorized-user account may do more harm than good.

For starters, some mortgage lenders may object to authorized-user accounts in general, especially if you don't have many active credit accounts. If you're 30 years old and are an authorized user on your parents' 15-year-old credit card account, a mortgage lender may view the resulting credit score boost as a poor measure of your own credit management skills.

What's more, the monthly payment on an authorized-user account will be used to calculate your debt-to-income ratio (DTI), which is an important factor in mortgage underwriting. The higher your DTI, the lower the monthly payment you'll qualify for, which limits how much you can borrow. And if your DTI is too high, you may not qualify for a loan at all.

It doesn't make sense to miss out on the home you want because of someone else's debt—you get the credit benefit of the account but aren't legally responsible for paying it off—so it may be best to remove yourself as an authorized user before starting the mortgage process.

How to Get a Mortgage

Getting approved for a mortgage can be tough unless you have a pristine credit history and a low DTI. There are, however, some things you can do to improve your chances by the time you apply.

Improve Your Credit Score

Because your credit scores are such an important factor in the mortgage process, making an effort to improve them can not only help you get approved but also score a lower interest rate. Some tips to help you get your credit ready for a mortgage include:

  • Check your credit score to know where you stand.
  • Get a copy of your credit report from AnnualCreditReport.com or one of the credit bureaus and look for areas that need your attention.
  • Dispute any erroneous information you find on your credit report, if applicable.
  • Get caught up on delinquent accounts and stay current going forward.
  • Pay off collection accounts.
  • Pay down credit card balances.
  • Avoid applying for credit unless absolutely necessary.

Save for a Down Payment

While a 20% down payment remains the gold standard for mortgage loans, it's not hard to find lenders that will accept as little as 3% or 5%—some even have programs that require no down payment.

That said, the higher your down payment, the higher your chances of getting approved for a loan with favorable terms. Saving for a big down payment can take time, so start looking for ways to sock away extra cash as soon as possible. Also, look for ways to earn more money and set aside the difference in a down payment fund.

Shop Around

While getting a mortgage loan can be difficult if you have bad or fair credit, it's not entirely impossible. As you're working on improving your credit and saving for a down payment, also take your time and research different lenders to see which ones are willing to work with you.

This process can take time, but it may help you get into a home sooner. Just remember that a lower credit score and down payment may result in higher interest rates, which can cost you tens of thousands more over the life of your loan.

The Sooner You Act, the Better

Getting a mortgage loan can be a time-consuming process, and getting your credit and savings ready for a mortgage can take even longer. So if you have your eyes set on home ownership, the sooner you start working on getting ready for a mortgage, the better.

Take a look at your credit report for any authorized-user accounts and consider removing them. Then look for other areas where you can improve and start addressing them.

This process takes time, but with a good plan, it can get you into a home sooner than if you didn't have a plan at all.

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