While credit standards have somewhat loosened up in home lending, make no mistake, getting a mortgage these days still requires scrutinizing your complete financial picture — especially your debts and your current credit standing. Here are the five most common credit mistakes that could throw a wrench in your mortgage process.
1. Disputing Credit Accounts
The Action: The consumer has a disagreement with a particular creditor and takes action by disputing with the creditor a charge, balance, payment or any aspect of the credit obligation. The creditor then places the account in the dispute status, changing the credit reporting to “in dispute.”
Why It’s an Issue: Mortgage lenders use what’s called an automated underwriting system, (AUS) for short, which is an algorithm that reviews a borrower’s total on-paper financial picture. The automated underwriting system used by lenders literally ignores any accounts in dispute. As such, the results of the automated underwriting system are flawed, because while the account is on the credit report, the algorithm ignores it because the account is in dispute. In other words, because it doesn’t provide an accurate rating of the true credit picture, the borrower would have to call the creditor and remove the account from dispute status, then the lender reruns the automated underwriting to ensure the loan gets approved in the system. If the loan does not get approved at this time, changes to the loan structure might have to be made, such as switching loan programs (from conventional to FHA, for example), reducing the loan amount or increasing the credit score.
2. Applying for Credit During the Loan Process
The Action: The consumer applies for additional types of credit while they’re in the process of seeking final approval.
Why It’s an Issue: Undisclosed debt could critically change any dynamic of the loan, and more importantly, could cause your loan to be denied. If your mortgage loan has not closed, taking out additional debt — even a credit card with a tiny limit — could change your credit score, which is material to your ability to qualify for the home mortgage. In addition, any associated debt with that balance, such as a monthly car payment, could easily drive up your debt-to-income ratio and jeopardize your loan approval. Knowing ahead of time what not to do can make all the difference.
3. Recent Debt Not Reported to the Credit Bureaus
The Action: The consumer takes out a credit obligation, then immediately applies for a mortgage.
Why It’s an Issue: If you have recently acquired debt that is not showing up on your credit reports because it is a brand-new obligation — say in the past 30 days — it would be wise to inform the lender so they can account for it in your debt-to-income ratio and it doesn’t become a change at the eleventh hour of your closing. Additionally, if the lender is privy to the information upfront, they can either obtain an updated credit report or credit supplement where they go directly to the creditor to verify any pertinent balance and payment information.
4. Maxing Out Credit Cards
The Action: The consumer accumulates a balance in an excess of 50% of the total available credit on any credit card, credit line or even home equity line of credit.
Why It’s an Issue: Maxed-out credit cards — especially accounts where the balance is equal to or over the total credit limit — are a red flag for lenders in the decision to approve your new mortgage. This situation also wreaks havoc on all three credit scores the mortgage lender looks at, especially if each account reports to each of the three major credit reporting agencies. A better way to manage a higher debt load is to spread the debt over multiple cards (if you have them), reducing the balance per card or consolidating the debts into one new account with a high credit limit. Consumers ought to not carry any more than 30% of the total allowable credit line at any given point in time if they want to maximize their credit score potential.
5. Carrying High Balances on 0% Credit Cards
The Action: The consumer carries a high debt load on 0% credit cards.
Why It’s an Issue: If you’re planning on getting a mortgage in the near future, don’t let the short-term 0% credit card offer fool you into thinking it’s OK to run up debt on that card. Why? You’ll still need to make that payment every single month. It doesn’t matter if your balance is $100,000 at 0% interest, it’s about the payment, and the lower the payment, the better. A lender wants to see that the minimum payments are very low in relationship to the income. Payments are king for the granddaddy of credit, a mortgage loan.
A consumer who has made of these common credit mistakes should consider speaking with a reputable mortgage loan officer. The loan officer can proactively walk them through the process of how to fix these credit blemishes, and take a preemptive approach in helping them qualify for home financing. It can also help to check your credit reports (which you can do for free once a year) and your credit scores to see what work you may need to do before you apply. You can obtain two of your credit scores for free on Credit.com, along with an overview of what’s affecting your scores.
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