Ten Credit Do’s and Don’ts Prior To Getting Your Phoenix Mortgage Loan

How can a fully approved loan get denied for funding after the borrower has signed loan docs?

Simple, the underwriter pulls an updated credit report to verify that there hasn’t been any new activity since original approval was issued, and the new findings kill the loan.

In the past, this generally wouldn’t happen.  However, after June 01, 2010, borrowers should anticipate a new credit report being pulled before funding.  This is a result of the new Loan Quality Initiative from Fannie Mae.

Purchase transactions involving short sales or foreclosures tend to drag on for several months, so this approval / denial scenario is more common.

It’s An Ugly Cycle:

1. First-Time Home Buyer receives loan approval call from their loan professional
2. Buyer assumes everything is set for purchase to be complete
3. Buyer makes a credit impacting decision (new car, furniture, run up credit card balance)
4. Funder pulls new credit report and denies the loan

In the hopes of preventing the collapse of a perfectly acceptable approval, we’ve developed a “Ten credit do’s and don’ts” list to help ensure a smoother loan process for our clients purchasing a home in Phoenix.

These tips don’t encompass everything a borrower can do prior to and after the Pre-Approval process, however they’re a good representation of the things most likely to help and hurt an approval.

Ten Credit Do’s and Don’ts:

DO continue making your mortgage or rent payments

Remember, you’re trying to buy or refinance your home – one of the first things a lender looks for is responsible payment patterns on your current housing situation.

Even if you plan on closing in the middle of the month, or if you’ve already given notice, continue paying that rent until you’ve signed your final loan documents.

Unless your lender otherwise instructs you, it’s always better to be safe than sorry.

DO stay current on all accounts

Much like the first item, the same goes for your other types of accounts (student loans, credit cards, etc).

Nothing can blow up a loan approval faster than a late payment showing up in the middle of the loan process.

DON’T make a major purchase (car, boat, big-screen TV, etc…)

This one gets borrowers in trouble more than any other item.

A simple tip: wait until the loan is closed and you have your keys in-hand before buying that new car, boat, or TV.

DON’T buy any furniture

This is similar to the previous, but deserves it’s own category as it gets many borrowers in trouble (especially First-Time Homebuyers).

Remember, you’ll have plenty of time to decorate your new home (or spend on your line of credit) AFTER the loan closes.

DON’T open a new credit card

Opening a new credit card dings your credit by adding an additional inquiry to your score, and it may change the mix of credit types within your report (i.e. credit cards, student loans, etc).

Both of these can have a negative impact on your score, and could result in a denial if things are already tight.

DON’T close any credit card accounts

The reverse of the previous item is also true. Closing accounts can have a negative impact on your score (for one – it decreases your capacity which accounts for 30% of your score).

DON’T open a new cell phone account

Cell phone companies pull your credit when you open a new account. If you’re on the border credit-wise, that inquiry could drop your score enough to impact your rate or cause a denial.

DON’T consolidate your debt onto 1 or 2 cards

We’ve already established that additional credit inquiries will hurt your score, but consolidating your credit will also diminish your capacity (the amount of credit you have available), resulting in another hit to your credit.

DON’T pay off collections

Sometimes a lender will require you to pay of a collection prior to closing your loan; other times they will not.

The best rule of thumb is to only pay off collections if absolutely necessary to ensure a loan approval. Otherwise, needlessly paying off collections could have a negative impact on your score.

Consult your loan professional prior to paying off any accounts.

DON’T take out a new loan

This goes for car loans, student loans, additional credit cards, lines of credit, and any other type of loan.

Taking out a new loan can have a negative impact on your credit, but also looks bad to underwriters and investors alike.

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Follow these Do’s and Don’ts for a smoother mortgage approval and funding process.

Just remember the simple tip: wait until AFTER the loan closes for any major purchases, loans, consolidations, and new accounts.