It’s no secret that your credit report and FICO scores play a big part when it comes to qualifying for a mortgage loan. Your credit scores, payment histories, and amount of outstanding credit give lenders insight into how well you manage your finances, how extended you are financially, and how much risk there is to lend to you.
The following are some important “dos” and “don’ts” related to credit reports to help you get the best possible on your next home loan.
Don’t let people run your credit report during the loan process. Lenders sometimes need to pull an updated credit report near the end of the loan process. If you’ve numerous inquiries since the initial credit report was run by your lender, it could pull down your scores and result in less favorable loan terms or loan denial. When you’re in the process of getting a new mortgage, don’t allow anybody to run your credit.
Don’t take on new debts. Lenders often will have you sign a document attesting that you haven’t acquired any new debts during the process of getting the new mortgage. If they discover that you have, they’ll include it in your debt-to-income ratio (DTI). If your DTI was already close to the maximum allowed by the lending guidelines, the added debt could result in a loan denial.
Don’t cosign for anybody. If the lender discovers a newly cosigned debt, they’ll include it in your debt-to-income ratio even if somebody else is going to be making the payments. If your DTI is tight already, this new debt could result in loan denial.
If you plan to cosign for somebody, make sure to do it after your new loan is funded.
Do continue to make all payments on time. Make sure to continue to make all debt payments (including your mortgage) on time as you move through the loan process. As I mentioned before, lenders often will update your credit report and/or mortgage rating near the end of the loan process, and if you’ve missed a payment on anything, it could jeopardize the loan.
Do unlock any credit report freezes before beginning the loan process. Credit freezes can take some time to clear, so if you have them on your credit report, make sure to remove them from your report for all three of the major credit bureaus (TransUnion, Equifax, and Experian) ahead of time.
If you begin the loan process before clearing the freezes, it can delay the processing of your loan and cause you to incur additional fees for rate lock extensions.
Do remove any consumer statements that could cause the lender to question your qualifications. People often add consumer statements to their credit reports to dispute the reported information. If you’ve added a consumer statement to your credit report, I recommend getting it removed – particularly if it’s related to your mortgage – before you begin the loan process. If an underwriter sees it, they may request additional information and/or documentation that otherwise could have been avoided.
Consumer statements can take some time to remove, so it’s best to do it well in advance of applying for the loan.
Do clear up any derogatory credit items before beginning the loan process. Derogatory items such as collections, judgments, and charge-offs can negatively impact your credit scores and prevent you from getting the best deal possible – or getting a loan at all.
Before you begin shopping for a loan, make sure to pull a copy of your credit report from all three credit bureaus (TransUnion, Equifax, and Experian) and clear up any derogatory items reported. Yes, it can be hassle to do this, but it could save you thousands of dollars in interest over the life of your new home loan or make the difference between qualifying and getting denied.
Do make sure home equity lines-of-credit are reporting as mortgages. I often see home equity lines (HELOCs) reported as revolving accounts (like credit cards) instead of mortgages on credit reports. If your HELOC is being reported as a revolving account and the balance is over 50% of the available limit, your credit scores could take a hit.
The credit bureaus rate your scores down if you have balances on revolving accounts over 50% of the limit because you appear to be “maxed out”. If your HELOC is reporting as a revolving account (often designated with an “R” on the credit report), be sure to call your lender ahead of time and get it corrected.
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- What is a Debt-to-Income Ratio (DTI) and How is it Calculated? - December 30, 2011