By now, everyone is aware that credit plays a major role in the approval process of a mortgage. It is no longer acceptable to have low credit scores or errors appearing on a credit report, but has become necessary for borrowers to look at their own credit history in order to eliminate issues prior to requesting a loan. Otherwise, there are some credit issues other than low credit scores that can kill your mortgage application if not found in advance and steps taken to eliminate them.
1. Repossessions can take seven or more years to be removed from a credit report. Each lender may handle repossessions differently depending on their individual guidelines.
2. Liens and judgements appearing on a credit report will need to be paid or have a payment schedule in place. It is important to have a schedule in place prior to a mortgage application or this issue will only hold up the process with no guarantees of approval.
3. Collection accounts are a big issue since they can reflect the type of repayment habits of a borrower. Most lenders will require that collections need to be paid off with no guarantee of approval. It is a better idea to take care of these issues prior to making an application.
4. Bankruptcy is always reported on a credit report and will indicate how many years have passed. In some cases, the credit report may not show that the bankruptcy has already been settled and that the accounts have been discharged. In this case, all of the bankruptcy papers will need to be sent to each of the credit reporting agencies who will verify that each of the accounts in question was actually included in the bankruptcy discharge. The type of mortgage that a borrower can obtain will depend on the number of years that have passed after the discharge date of the bankruptcy. Borrowers will also need to show satisfactory credit established after the bankruptcy.
5. Late payments for any accounts will affect a borrower’s credit scores, as well as, the lender’s decision regarding a mortgage approval. When late payments are present, it is probably a good idea to wait approximately twelve months before applying for a mortgage. Each lender may have their own guidelines as to the amount of time. During that waiting period, it is important to keep all debt payments paid in a timely manner.
6. Unpaid student loans are a major issue since these are not removed from the credit report. Student loans must be paid on time or put into forbearance. Very often, multiple student loans can be consolidated into one loan which will have a lower monthly payment.
7. Having too much debt becomes an issue when it has an impact on the debt to income ratios which calculate too high to receive an approval. Paying off some of the debt to reduce the DTI on the loan to a reasonable amount should be a priority before applying for a loan.
8. Not having any credit is a problem since a lender cannot determine how much of a risk the borrower presents. When a borrower does not have any credit, the only option available is using government mortgages for purchasing a home. It is usually a better decision to obtain at least three credit lines for several months in order to establish credit prior to submitting an application.
9. Identification issues appear very often on credit reports. These errors can be incorrect name, incorrect name and social security number, correct name with incorrect credit lines, incorrect employment or residences. In order to correct these problems, the borrower will need to produce the documentation that verifies their identity and any other information that the credit bureaus require.
10. When the credit report information differs from information presented on the mortgage application, there is the issue of falsifying the loan documents. This can happen when a borrower already owns a home that is paid in full, but does not tell the lender. The lender will require the Satisfaction of Mortgage and other documents in order to determine the amount of expenses associated with the home. This can affect the debt to income ratio to the point that the mortgage is not approved.
Although many credit issues are common and dealt with often, there are many unusual occurrences that may appear. When this happens, it is up to the lender and their guidelines as to whether they want to take the risk of approving the loan. The best thing that any borrower can do is to examine their credit report from all of the agencies prior to applying for a mortgage. From that point, the borrower can determine what has to be done to improve and correct their credit to the point that they will receive loan approval. In some cases, correcting the problems and having a rescore done will improve the credit scores. In other cases, borrowers may have to wait it out and allow the necessary time to pass. In all cases, lying on the mortgage application can only cause problems and lead to a denial.
Photo Credit: Flickr/espensorvik
