8 Important Credit Report Dos And Don’ts When Qualifying for a Home Loan

by | BiggerPockets.com

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 terms on your next home loan.

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8 Credit Report Dos and Don’ts When Qualifying for a 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.

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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.

Related: Why Boosting Your Credit Score to “Excellent” Can Make You a Better Investor

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.

Related: Can You Invest in Real Estate With Bad Credit? (Maybe… Here Are 5 Ways to Do It)

Before you begin shopping for a loan, make sure to pull a copy of your credit report from all three credit bureaus 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.

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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.

Investors: Any items you’d add to this list that have helped you qualify for loans?

Let me know with a comment! 

About Author

Mark Fitzpatrick is a mortgage banking veteran and real estate investor who blogs about mortgage financing and related topics at MortgageMusings.com. You can follow Mark on Google+ or on Twitter. NMLS #382064.

5 Comments

  1. Huiping Sheng

    Thanks Mark for nice sharing intensively for loan related knowledge?.
    I got a conventional loan two month ago through a loan broker. The broker run my credit score, and then the lender/bank run the credit score again, even close to the end of the closing date. All those happened within 45 days. Very bad thing happened: my credit score dropped 38 although it is still close to 790. I think I can’t deny the lender to run the credit score. I remember my credit score increased few years ago after I purchased my first property. I saw the statement for warning is too much credit inquiry. Will my credit score increase again and how long it will back to normal? Assume I have good credit behavior and the loan to income is not the issue.
    Happy Holiday!
    Huiping

  2. Hi –

    I was just wondering to what extent will my ability to qualify for a mortgage with a “low” rate if I’ve obtained multiple credit cards within the past 12 months but have utilized less than 2% of the approved credit limit? Additionally, my credit score has consistently remained above 800. I know that there’s a lot that goes in on determining a person’s creditworthiness but from these two metrics, I was hoping to get general thoughts on this inquiry. High credit limit, low utilization rate, consistent high credit score but multiple credit lines opened within the past year. Thanks.

  3. Thanh Nguyen

    I am in the process to shop for mortgage lender to compare rates and fees. From my understanding, a mortgage inquiry on your credit is a hard inquiry. However, when shopping for a mortgage, there is a 30-45 day grace period where you can allow multiple mortgage companies run your credit but only one hard inquiry will be accounted against you as you have the right to shop for a mortgage. The credit bureaus recognize this as “shopping for a mortgage.”

    Detailed article here: https://www.creditsesame.com/blog/mortgage/mortgage-inquiries-07062011/

    Is this true and how is it different from the first Don’ts “Don’t let people run your credit report during the loan process”

    Please advise.

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