Tri-Valley Mortgage News

Tips for preserving your credit during the loan process

My last post mentioned that lenders ordering a pre-closing credit report and comparing it to the initial credit report may become standard practice. With this in mind, the following tips could help borrowers ensure that no surprises come up that could jeopardize their closing:

1. Don't incur new debt until your loan is closed. This can be tough especially for home buyers who want to secure a great deal on furniture or appliances prior to moving in. But new debt incurred before closing will be counted against your income and could potentially tip your debt ratios over the maximum allowed!
2. Don't let a creditor run your credit before your loan is closed. As mentioned above, even if you are just browsing for new merchandise, do not let anyone run your credit. This results in an "inquiry" that the lender will see when they run your final report. This may cause your scores to decrease depending on how many inquiries you've incurred since your last report. Don't risk it!
3. Don't pay off collections or charge-offs. This sounds counter-intuitive but the fact is, if you pay off one of these types of accounts it will refresh the date of last activity on the account and cause a dip in your credit scores as you are. If the lender has approved your loan, leave these accounts alone until after your loan closes
4. Do not charge up your existing credit cards. Along the same lines as in example number one above, do not make any major purchases on your existing credit accounts. The additional debt can both lower your scores and possibly cause your debt ratios to exceed the maximum allowed.
5. Don't consolidate your debt into one or two cards. Again this may be counter-intuitive but it is better to have debt spread out across many cards rather than maxing out one or two cards. Doing so can have a negative impact on your scores.
6. Finally, please continue to pay your credit accounts in a timely manner. Keep track of due dates and make sure everything is being paid on time throughout your loan process. Nothing could be more devastating than to have a late mark on your credit at closing cause your entire transaction to fall apart.

If you have any questions about your credit, contact me and I will be happy to discuss these tips in greater detail.

Anyone currently applying for a home loan should be aware that after June 1^st, lenders will start ordering a second credit report prior to the loan closing. This move is mainly in response to an initiative by Fannie Mae, one of the largest companies that purchases mortgage-backed securities in the county that encourages lenders to give consideration to the borrower's credit profile just prior to closing and comparing it to the initial credit report pulled at the time of application. The reason that they have requested lenders do this is because there is the potential for a borrower to make decisions during the loan process that might cause them to be less qualified for the loan even prior to that loan closing. For instance, a potential borrower might, in the course of the loan, buy a new car with a large payment which would decrease their ability to make their proposed mortgage payments in a timely manner.

Any negative change in the borrower's credit profile prior to closing could potentially decrease the amount of the loan they qualify for, increase the interest rate or in the worst case, cause the loan to be entirely declined. The best way to ensure a loan does not fall out due to the supplemental credit report is to be fully informed of what to do and what not to do during the loan process where credit is concerned.

Recently, the monthly E-zine (below) I send to my clients called "YOU Magazine" had a fantastic video and article regarding this issue. You can view it here.

In my next post, I will give a few tips on how to preserve your credit during the loan process to ensure and smooth and timely closing...