Credit and Home Loans

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Buying a house can be both a thrilling and simultaneously nerve-racking experience. One of the reasons that the home buying process can be stressful — besides the fact that it’s likely the biggest purchase most people ever make — is the daunting qualification process that takes place when applying for a mortgage.

During the process, it is important to understand that qualifying for a home loan is very different than applying for other types of credit loans. Why do you ask?

#1: Lenders Look at All Three Credit Reports and a few different Credit Scores

The main difference between applying for a mortgage and other types of financing is that, with a mortgage application, all three of your credit reports and three of your credit scores will be scrutinized. Whereas when you apply for other types of loans (e.g., credit cards, personal loans, auto loans), only one of your credit reports and one of your scores will be reviewed.  A FICO score of 740 will earn you the best mortgage interest rate.

Since there are three of your credit reports and scores being reviewed during a mortgage application, a compromising item on a report, especially a public record (such as past-due child support) or collection account with an outstanding balance, could potentially stop progress on your mortgage application — even if the offense only shows up on a single credit report.  Everything on all the reports will be investigated for everyone on the loan application.  Each credit report will list three FICO scores.  The lender will always use the middle score of each credit report.  When two or more persons apply for a home loan, the lowest middle score will be used to determine the interest rate.  In some cases when one borrower has much better credit, it is advantageous to put the loan in their name only to get the best interest rate.  Loan programs vary so ask a mortgage broker what is best for you.

If you were applying for an auto loan, you might still be able to qualify for financing if you had an outstanding item present on only one of your credit reports, but that’s not the case during the home loan application process – the lender has access to everything.

#2: Just Because You’re Initially Approved Doesn’t Mean Your Credit Is Off the Hook

When you initially apply for your home loan, you may receive a “preapproval” letter from the lender, but contrary to popular belief, the letter is not a guarantee of a loan.

While working with a lender will make realtors more willing to work with you and may even make sellers more inclined to seriously consider your offer, you should keep in mind that simply because your credit passed a lender’s initial review does not mean that the lender is 100% obligated to follow through with the loan.

True, your lender will have reviewed your credit reports and scores prior to issuing your preapproval, but it’s important to keep in mind, your credit will be checked again just before closing.

In fact, since the closing process can take up to 3 months to complete, some lenders require a final credit check prior to closing in order to ensure your credit hasn’t undergone any significant changes. This means it’s important to be on top of your credit and avoid increasing your debt-to-income ratio (DTI) in any way during the process.  It is best to consult your lender before paying off any debts as well.  Sometimes it is better to have money left in a savings account.

You should definitely avoid any changes in your credit reports in order to prevent giving the lender any reason to delay your loan closing, or even deciding to cancel the closing altogether.

The bottom line: Once you make your initial application for a home loan, avoid doing anything to your credit until you unlock the door to your new home.

I wrote a Home Buyer’s Guide a few years ago that explains this process in far more detail.  For a free download click here.

Buyer’s in a Competitive Market

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