Nothing
is more exciting to me than to hand over the keys to a brand new (or at least
new to the buyers) home to a family that is purchasing their first home. For
many, it is the realization of a dream that seemed to always be just around the
corner, but has now finally arrived.
Home ownership is a journey that can be
filled with many challenges, and it is most definitely a process. The key to
success is making sure that you fully understand the challenges, are aware of
and have a good understanding of each step, and most importantly have sound
counsel to walk you through this process that can be filled with many turns and
unexpected surprises that only experience can help you avoid.
This journey will begin with the mortgage application and preliminary credit
check. You will be ultimately be asked to provide a mountain of documentation,
and sign disclosures and other paperwork that, when all stacked together, looks
like a trade bill instead of a real estate transaction; but get used to it.
It’s part of the initiation into home ownership. I will talk more about that in another blog. But for now, here are some helpful tips to avoid the credit mistakes that many
borrowers make during the loan process:
1.
DON’T APPLY FOR NEW CREDIT OF ANY KIND. Including those “You have been pre-approved”
credit card invitations that you receive in the mail. Every time that you have your credit pulled
by a potential creditor or lender, you lose points from your credit score
immediately. Depending on the elements
in your current credit report, you could lose anywhere from 2-50 points for one
hard inquiry.
2.
DON’T PAY OFF COLLECTIONS OR CHARGE OFFS during the
loan process. Paying collections will
decrease the credit score immediately due to the date of last activity becoming
recent. If you want to pay off old
accounts, do it through escrow, and make sure that 1) you validate that the
debt is yours, and 2) that the creditor agrees to give you a letter of
deletion.
3.
DON’T CLOSE CREDIT CARD ACCOUNTS. If you close a credit card account it will
appear to the FICO that your debt ratio has gone up. Also, closing a card will affect other
factors in the score such as length of credit history. If you have to close a credit card account,
do it after closing, and make sure it is a more recent account.
4.
DON’T MAX OUT OR OVER CHARGE ON YOUR CREDIT CARD
ACCOUNTS. This is the fastest way to
bring your score down 50-100 points immediately. Try to keep your credit card balances below
30% of their available limit at all times during the loan process. If you decide to pay down balances, do it
across the board. Meaning, make an extra
payment on all of your cards at the same time.
5.
DON’T CONSOLIDATE YOUR DEBT ONTO 1 OR 2 CREDIT
CARDS. It seems
like it would be the smart thing to do, however, when you consolidate all of
your debt onto one card, it appears that you are maxed out on that card, and
the system will penalize you as mentioned above in 4. If you want to save money on credit card
interest rates, wait until after closing.
6.
DON’T DO ANYTHING THAT WILL CAUSE A RED FLAG TO BE
RAISED BY THE SCORING SYSTEM. This
would include adding new accounts, co-signing on a loan, changing your name or
address with the bureaus. The less
activity on your reports during the loan process, the better.
7.
DO JOIN A CREDIT WATCH PROGRAM. If you join a credit watch program, you can
check your reports weekly, or even daily depending on the program you
select. (When you pull your own
reports, you don’t get dinged for a hard inquiry.) This way, if something does show up on your
reports that has caused your score to go down, you’ll know it immediately, and
you may be able to take care of the problem before closing.
8.
DO STAY CURRENT ON EXISTING ACCOUNTS. Like your mortgage and car payments. One 30-day late can cost you anywhere from
30-75. If you pay your balance off each month, make sure that your payment
posts at least a day before the due date. When the system does its monthly run
on that due date, you will appear to have a zero balance. If you are making
payments, try to pay more than the minimum.
9.
DO CONTINUE TO USE YOUR CREDIT AS NORMAL. Red Flags are raised easily with
the scoring system. If it appears that
you are changing your pattern, it will raise a red flag, and your score could
go down.
10.
DO CALL YOUR LOAN OFFICER OR BROKER if you
receive something in the mail from a creditor or collection agency that you believe
may affect your score during the loan process.
Your loan officer may be able to supply you with the resources you need
to stop any derogatory reporting to the bureaus.
Looking for real estate services? If you, or a friend or relative is looking for a new home, commercial building or lease, have them give me a call at (714) 584-5509, or send me an email at frank@resusa.org. There are a variety of listed and unlisted opportunities for investors and first time home buyers alike. Let me know how I can help.
As a Realtor and residential developer, I am often asked what the best method is to select a mortgage lender. Your choice begins with whether you want to work with a direct lender or with a loan broker. My preference is with a direct lender, however, there are distinct advantages to both, and ultimately it will come down to your personal preference. 
