Credit continues to be a hot topic. Having credit, maintaining credit and keeping the credit scores as high as possible is everyone’s aspiration. Unfortunately, many consumers are unaware of some of the credit blunders that inevitably show up when it comes time to obtain a home loan. In fact clearing up one myth before we get started, pulling a credit report for a home loan does not automatically make the credit score drop.
It is encouraged for consumers to shop for a mortgage, and in doing so, credit inquiries are common. Where people get into trouble, is when they are recklessly applying for different types of credit within a 30 to 45 day period of time, this does have the potential to negatively impact all three scores.
If you’re planning on getting financing to buy a home or re-mortgage a home you already have, you’ll want to be aware of some of the blunders consumers typically make on their credit report that makes their ability to procure a loan more stringent.
1. Deferred liabilities like student loans
These will be reviewed as though the liability is a current ongoing expense. A better solution would be to provide supporting documentation from the student loan company showing you’re not responsible for the obligation for 36 months at the minimum or longer and then the lender will not look at this as a current liability against borrowing power.
2. Not having three credit scores
This varies from lender to lender, but the consensus is, if you don’t have three credit scores, one score per bureau, you’re going to have a challenging time getting lender’s underwriter to sign off your file. Find a lender that needs to credit scores, lower of the two will be used.
3. Paying off credit cards in full every month
You diligently pay off each card in full every month right? By the same token, trying to time when you’re lender pulls the new credit report for your mortgage relative to the time each creditor reports to the credit bureaus is virtually impossible. The minimum payment liabilities will reflect against borrowing power unless each card is paid off in full and closed, double-edged sword, because closing credit cards reduces the credit score. Best to let lender use the liabilities as they are probably low anyway when each card is paid off in full each month.
4. Co-signing on someone else’s debt
You will need to provide 12 months of canceled checks or 12 months of bank statements to showing on paper another party makes the payment directly to the creditor. Without this supporting documentation, the lender will account for the liability against your borrowing power even though the debt belongs to someone else. Best to avoid lending your credit.
5. Trying to shop rates if your credit score is sub 700
If your credit score is under 700, there’s a reason for it, maybe a previous collection, a derogatory item in the last few years, too much debt something is pulling the credit score down. As a result, shopping rates is going to be very tricky risk-based pricing from lender to lender does vary, best to stick with one lender who can get you qualified with a reasonable rate given the score.
6. Closing credit obligations
If you no longer have a use for a particular credit card, keep it open, don’t use it, but do keep it open. The act of closing a credit card sends artificial signal to the bureaus you can’t manage your debt. Keep the credit card open to support a positive score rating.
7. Multiple obligations showing high liability payments
Home mortgage lenders are obligated to account for the liabilities that show up on a borrower’s personal credit report. The higher the monthly liabilities the more adverse weight is given against borrowing power. If you can, try consolidating the accounts into one new low payment for all obligations, before applying for the loan.
8. Any mortgage late in the last 24 months
A mortgage late, is reviewed as a 30 day delinquency reported on a credit report. If you make your mortgage payment a few days late you pay a late fee, but that’s not considered a late in the eyes of the credit bureaus. Having a late in the last 24 months will need to be explained, especially in the last 12 months, varies on loan program, avoid a late if at all possible when trying to qualify for a new loan.
9. Applying for or raking up other credit during the loan process
This means accumulating debt on a credit card, applying for a new credit card or any other credit obligation where a Social Security number is required. Wait for the loan to close escrow prior to making any changes to the credit report.
10. Having bankruptcy, short sale or foreclosure report on the credit history
This probably goes without saying, a detailed explanation with supporting documentation will be required. Doesn’t necessarily preclude you from securing a home loan, but will definitely be scrutinized. 24 months after a short sale, 24 months after a bankruptcy and three years after a foreclosure makes a consumer eligible for securing a home loan again.
If you are trying to secure a mortgage and having challenges with your credit report, contact Scott.Sheldon@nafinc.com today!
