Valuable credit tips for mortgage seekers
With mortgage interest rates still hovering near historical lows, it’s a great time to refinance an existing mortgage or make the jump from renter to homeowner. And while the process of applying for a mortgage loan is extremely cumbersome, the trade-off of cheap money can make it worth the trouble. But before you think about applying for a mortgage loan, there are a few things to keep in mind so you don’t accidentally blow your chances of being approved.
All of your credit reports will be reviewed. When you apply for a credit card or an auto loan (and pretty much any other non-mortgage related credit), the lender typically will access only one credit report, from one of the three credit reporting companies (CRCs), Equifax, Experian or TransUnion. In the mortgage environment, however, the lender will likely pull credit reports from all three CRCs. And if you’re jointly applying with another person, three credit reports will be accessed for him or her, as well. That means three or six credit reports will be one of the factors used to underwrite your loan.
is important because if you’ve got errors or negative information on
any of your credit reports, the mortgage lender is going to see them.
That means it’s in your best interest to review all of your credit
reports shortly before you apply for your loan, so you can correct any
errors and address credit-related issues that might delay or prevent
loan approval. You can access your credit reports for free once every 12
months at www.annualcreditreport.com.
Your “middle numeric score” better be good enough. When a lender pulls three or six credit reports, it also will see three or six credit scores. Credit scores are calculated on an individual credit-report-by-credit-report basis, so six credit reports means six credit scores.
This poses a potential problem because it’s highly unlikely the scores from all three CRCs will be the same at any given moment. The mortgage lenders therefore must decide on which score(s) to base its loan decision and set loan terms, such as your interest rate. The standard practice in the mortgage world is for a lender to use the middle numeric score for each applicant as its basis. So, if your scores are 700, 680 and 675, your terms will be based on your 680 score.
Because the data on credit reports often varies, the resulting credit scores are also going to vary. There isn’t much you can do about this variation, except to take steps that will likely improve all of your scores in the weeks and months leading up to when the lender pulls your credit-reports. The fastest and most legitimate way to quickly improve all your credit scores is to pay down (or pay off) your credit card debt and then keep that balance as low as possible. Doing so could bring considerable improvement to all of your credit scores within just a few weeks.
Don’t take on any new debt until after you’ve closed. Most consumers think that once their loan has been approved, they’re in the clear for an easy closing, but that’s not necessarily the case. In 2010 Fannie Mae introduced its Loan Quality Initiative (LQI), which is meant, in part, to “ensure that the loan meets credit standards.” The initiative directs lenders to take a second look at each applicant’s credit reports and credit scores just before closing, in addition to the credit review that took place when the application was submitted.
second credit screening means homebuyers should think long and hard
about taking on any new debt during the underwriting period, which last
several weeks (or even months). If you apply for any new credit or make
large charges to existing credit card accounts, those activities will
show up on your credit reports and could derail your closing. Mortgage
lenders now have to confirm that your credit quality hasn’t changed for
the worse in any material way since your application date. New debt, new
loans, new credit inquiries and lower credit scores are not what they
want to see.
In conclusion, it’s an advantageous time to seek out a mortgage loan, but it’s also a time of great scrutiny on borrowers’ creditworthiness. By giving a little attention to your credit profile before you apply for a home loan, you can ensure you look as appealing as you deserve to when lenders consider your application.