It is no secret that the loan application process can be time consuming and stressful. The last thing you need to deal with is an unexpected item with your credit report. What most borrowers aren’t aware of is that the credit score you have at the beginning of the process may not be the same come the end of it. Lenders have the right to re-pull your credit right before closing to verify the score and liabilities. Just one missed payment can lower your credit score enough that it falls below program guidelines. When this happens weeks of gathering documents and getting all of the items of the loan can be for naught. If you are applying for a loan here are a five items with your credit report you need to keep in mind.
- Know Your Score. The loan application process starts with your credit score. You can be strong in other areas but if your credit score is weak you will have trouble getting approved. As a borrower you need to know where you stand even before you apply for a loan. There are many places that you can find a copy of your report. In addition to the score you can also find all of the liabilities listed as well as any delinquent items. Knowing where you stand and what is on your report gives you time to fix any potential problems. Paying down a balance on one account or removing an old item can give your credit score a quick boost. Improving your score by as little as just 20 points may push it over a threshold that will produce better terms and even a lower interest rate. Without knowing your score you can be caught off guard when you apply and start the process behind the eight ball.
- Work On Delinquent Items. As you view your credit report you should always see if there are any collections, charge offs or liens currently listed. Even though you may think you have always paid everything on time there may be an old account that has slipped through the cracks. An old credit card from college can single handedly weigh your credit score down without you even knowing it. Collections and charge offs are not the end of the world but must be dealt with as quickly as possible. The older the accounts are the more difficult they can be to remove. Not only do you need to find the account holders information but you need to produce a receipt of payment. Many collection accounts switch hands constantly with the original account holder having no idea who or when it was sold. Any collections or charge offs must be paid off prior to or at the closing. The quicker you can start finding out who and where to pay it is one less thing you will have to worry about in the process.
- Avoid Excessive Credit Pulls. Every borrower wants to get the best possible deal. In the mortgage world you need to be careful how you go about that. You can’t let every mortgage broker or lender you talk to pull your credit report. A few credit pulls a month are fine but once you go over three you will see a dip in your scores. Excessive credit scores are seen as a sign that you are having trouble getting approved. Even if this is not the case it will be reflected in your score. The solution for this is to pull a copy of your credit prior to shopping around. If a lender asks to pull your credit you can provide them with your scores and any liabilities they need. They won’t be able to issue you an official pre-qualification but they can give you a pretty good idea of where you stand.
- No New Debt. Once the loan process is started you need to keep things status quo. The average loan time is roughly 45 days. During this time you should avoid opening up any new debt. You may be tempted to take advantage of low rates if you are shopping for furniture. This is one of the worst things you can do. By opening up new debt you possibly lower your credit score but you also add debt to your liabilities. An increase in debt can increase your debt to income ratio. If your debt to income ratio is above program guidelines your loan will not be approved.
- Make Payments. As obvious as it sounds you need to continue to make your monthly payments on time. As we mentioned just one 30 day late payment can throw your credit score for a loop. Your scores will continue to suffer until you are caught up with that account. There are many borrowers who think they are out of the woods once they receive loan approval and do not have to do anything else. They are in for a gut punch when their credit is pulled right before closing and they are not approved. You only need to make timely payments for one month, maybe two, when you apply for a loan. Don’t make the mistake of thinking you can be a few days late with a small payment just because your loan is approved.
The loan process starts and ends with your credit score. Don’t let a small mistake with your credit report impact your loan approval.
