5 Common Mistakes That May Hurt Your Home Mortgage Approval
The Homeowner Affordability and Stability Plan recently initiated under the Obama administration will provide millions of people with the opportunity to obtain financing which will allow them to keep their homes. For people currently behind on their mortgage payments, there are provisions in the plan that are designed to help many who are already in or potentially face the threat of foreclosure. However, just applying for a special home loan program doesn’t necessarily mean you’ll automatically be approved.
Whether or not you’re actually eligible for this particular loan, there are some things you should try to avoid to help improve your chances of being approved for the mortgage you want. Pay attention to these 5 deadly credit mistakes that could cost you that approval:
1. Running up credit card balances
By running up a balance on your credit card(s), you’re unfavorably swinging one of the key credit score indicators – the debt-to-income ratio. Lenders would prefer to see you make a lot more money than you currently have in debt, and the greater the difference, the happier they are. To score well in this department, pay down any existing balances as much as possible, and avoid large purchases before you get your loan.
2. Financing major purchases before applying for a home loan
Countless people inevitably ‘kill the deal’ by purchasing a car or taking out a big loan from a finance company or their credit union right before they apply for a home loan. Similar to running up credit card debt, this additional debt can make the difference between getting approved or denied. If at all possible, wait until after your home loan has funded before financing other purchases. Believe it or not, many lenders will run your credit again even after they have approved your loan to find out if you have since applied for more credit. If you are purchasing a home, you will want to wait until the day that your loan has actually closed. If you are refinancing a primary residence, there is a 3-day rescission (cancellation) period, even after you have signed the loan papers before your loan has funded.
3. Putting it off until the last minute
Many homeowners with an adjustable rate mortgage start to inquire about refinancing only 2 to 3 months before their initial rate expires, but by then it’s often too late. Because the criteria to qualify for all types of mortgages have become more strict; if you have a loan with a high interest rate or payments that are scheduled to reset in the next 1-3 years, you’ll want to start getting prepared now. Unfortunately, many people who have had their homes foreclosed on or are now facing foreclosure could have qualified for a more stable and affordable loan program had they taken the time to get better prepared ahead of time.
4. Paying off old collections and charge offs
Many people who have re-established their credit often have some old bad debt (2-5 years old or more) that still shows up on their credit report. In most cases, paying off an old bad debt is a bad idea. It causes the account to reset and become current which more adversely affects your credit score. For homeowners who obtained a subprime loan, you’ll want to learn how to effectively manage your credit well in advance of applying for a home loan to qualify for financing. If you’re looking to purchase a home in the future, start educating yourself about what is required to obtain financing at least a year before you need a loan.
5. Signing up with credit counseling agencies
Lenders see ‘credit counseling’ as a red flag. To them, it means someone who doesn’t know how to manage their own finances, even if you learned from the counseling and are on the right track now. Credit counselors will usually have good advice for getting out of debt, but the actions they recommend won’t reflect as nicely on your credit score. Typically, closing healthy credit accounts is a top recommendation – which is great for limiting your debt – but looks fishy on your credit report.
To qualify for a certain type of home loan under the Homeowner Stability Initiative, you might have to sign up for HUD-certified debt counseling program, but otherwise you should stay away from credit counseling before applying for a home loan. If you really have a spending problem, a better strategy is to put your credit cards where they aren’t easily accessible to you (like a safe deposit box), or even cut them up. Keep the accounts open, and continue to pay down your balances and make your payments on time.
Understanding the home financing process and how to manage your credit well before obtaining a mortgage will ensure you get the best and safest terms as well as avoid the common mistakes that can cause your loan to be denied.
