|Five mistakes mortgage shoppers need to avoid
While credit standards have somewhat loosened up in home lending, make no mistake, getting a mortgage these days is still an unraveling of your complete financial picture, with strong significance given to your current credit and liabilities. Following are the five most common credit mistakes wouldbe borrowers should know that may affect their loan process.
Disputing credit accounts
• The action: Consumer has a disagreement with a particular creditor. Consumer takes action by requesting creditor to dispute 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: Home loan lenders use what’s called an automated underwriting system (AUS), 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 “approves.” If the loan does not approve at this time, changes to the loan structure might have to be made, i.e. switching loan programs, reducing the loan amount and increasing the credit score.
Applying for credit during loan process
• The action: 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, more importantly, could cause your loan to be denied. If your mortgage loan has not closed, taking out additional debt such as even a tiny credit card could change your credit score, which is material to your ability to qualify for the home mortgage. More importantly, any associated debt with that balance such as a monthly car payment could easily drive up your debt to income ratio, jeopardizing a loan approval.
Recently accumulated debt
not reported to credit bureaus
• The action: Consumer recently 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 reporting because it is a brand-new obligation, as in under the most recent last 30 days, it would be a wise decision to inform the lender of what this payment obligation will be so they can account for it in your debt-to-income ratio. Moreover, so it doesn’t become 11 o’clock change at closing. Additionally, if the lender is privy to the information up front, 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.
Max out credit cards
• The action: Consumer accumulates a balance in an excess of 50 percent of the total allowable credit line 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 even over the total credit limit, is a red flag for lenders as it paints a less than desirable favorable credit history in the decision to issue new credit (i.e. new mortgage). This situation also wrecks havoc on all three credit scores, especially if each account reports to each credit bureau. A better way to manage a higher debt load is to spread the data over multiple cards, reducing the balance per each card per each credit line or consolidating the debts into one new account with a high credit limit. Consumers ought to not carry any more than 30 percent of the total allowable credit line at any given point in time for maximum credit score potential.
Carrying balances on zero percent credit cards
• The action: Consumer carries a high debt load on zero percent credit cards.
• Why it’s an issue: Don’t be fooled by a short-term zero percent credit card offer thinking you’re making a smart financial move, especially when it comes time to getting a mortgage. Why? A payment is still going to be required to be made every single month. It doesn’t matter if your balance is $100,000 at zero percent interest, it’s about the payment. The lower the payment, the better. High isn’t so much as long as 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 any of these common credit mistakes could be best served speaking with a reputable mortgage loan officer who can proactively walk them through the process of how to fix these credit blemishes by taking a preemptive approach in helping them qualify for home financing.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.