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The Do’s and Don’ts During the Mortgage Loan Process
Sep. 24th, 2009
YUMA, AZ – There seem to be many misconceptions about personal credit and credit scoring.
While those misconceptions may not make much of a difference normally, during the loan process for a mortgage the failure to follow these simple rules may prove disastrous.
When a mortgage application is received, a credit report is run providing the underwriter with your credit score and credit history. Each lender has different guidelines they must follow on how long that credit report if valid. Typically a credit report is good for no longer than 120 days but in some cases may be updated prior to your mortgage loan closing and/or within 30 days of your loan closing. You should not do anything that will have an adverse affect on your credit score while your loan is in process. If you are moving into a new home, you might be thinking about purchasing new appliances or furniture, but this really is not the right time to go shopping with your credit cards or establishing any new lines of credit. You will want to remain in a stable position until the loan closes, giving you the opportunity to qualify for the best interest rate and loan program available. Here is a handy list of do's and don'ts that you should adhere to until after your loan has closed.*
DON'T APPLY FOR NEW CREDIT OF ANY KIND − If you receive invitations to apply for new lines of credit, don't respond. If you do, that company will pull your credit report and this will have an adverse effect on your credit score. Likewise, don't establish new lines of credit for furniture, appliances, computers, etc. Remember, every credit inquiry has the potential to reduce your score between zero and 40 points depending on your credit profile. Additionally, newer trade lines without past credit history will adversely affect your score. Lastly, when new credit is granted, especially for furniture and appliances, you are generally given a line of credit for the amount of the purchase. Credit scores are also based on the percentage of credit used versus the amount of total credit. Therefore, new trade lines like this will have a dramatic impact on your credit score during the loan process.
DON'T PAY OFF COLLECTIONS OR CHARGE−OFFS − Once your loan application has been submitted, don't pay off collections unless the lender specifically asks you to in order to secure the loan. Paying off old collections causes a drop in the credit score because this will move an older account to a current account. The more recent an account is, the more weight it is given by the credit bureaus. The proper way to pay off collection accounts to qualify for a mortgage is at the actually closing through escrow. This insured no change in the credit history until after the closing, and you now have proof of when and how those accounts were satisfied.
DON'T CLOSE CREDIT CARD ACCOUNTS − If you close a credit card account, it can affect your ratio of debt to available credit which has a 30% impact on your credit score. If you really want to close an account, do it after you close your mortgage loan.
DON'T MAX OUT OR OVER CHARGE EXISTING CREDIT CARDS − Running up your credit cards is the fastest way to bring your score down, and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit cards below 30% of the available credit limit.
DON'T CONSOLIDATE DEBT TO ONE OR TWO CARDS − Once again, don't change your ratio of debt to available credit. Likewise, you want to keep beneficial credit history on the books.
DON'T RAISE RED FLAGS TO THE UNDERWRITER − Don't co−sign on another person's loan, or change your name and address. The less activity that occurs while your loan is in process, the better your credit score will be.
DO JOIN A CREDIT WATCH PROGRAM − Your bank, credit union or credit card company may be able to provide you with a free credit watch program that can alert you to any changes in your credit report. This can be a safeguard to help you intervene before the underwriter sees a problem.
DO STAY CURRENT ON EXISTING ACCOUNTS − Late payments on your existing mortgage, car payment, or anything else that can be reported to a CRA can cost you dearly. One 30−day late payment can cost anywhere from 30 to 75 points on your credit score.
DO CONTINUE TO USE YOUR CREDIT AS YOU NORMALLY WOULD − Red flags are easily raised within the scoring system. If it appears you are diverting from your normal spending patterns, it could cause your score to go down. For example, if you've had a monthly service for Internet access billed to the same credit card for the past three years, there's really no reason to drop it now. Again, make your changes after the loan funds.
DO CALL YOUR LOAN CONSULTANT − If you receive notification from a collection agency or creditor that could potentially have an adverse affect on your credit score, call us so we can try to direct you to the right resources and prevent any derogatory reporting to credit bureaus.
* SOURCE: Based on The Top 10 Credit Do's and Don'ts During the Loan Process, provided by Credit Resource Corp.
http://www.creditresourcecorp.com
Derek Egeberg is Certified Mortgage Planning Specialist, CMPSR, with over 9 years of residential lending experience. If you have any further questions on this topic or any other, you can contact Derek at [928-314-1008] or email Derek@TheApprovalCoach.com.
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