Wednesday, September 11, 2013 / by William Culp
With home prices rising and interest rates well below historic norms, many potential buyers would like to get into the marketplace but are stymied by one hurdle: credit.
"The credit process mystifies many borrowers," says Ray Brousseau, Executive Vice President of a mortgage service company active in more than 40 states.
"They worry that their credit may be imperfect or that a late payment from long ago will doom a loan application, when the reality is different."
Brousseau explained that "lenders and borrowers have similar goals. They both want the mortgage application to go through. The lender will create a package to provide a full picture of the borrower's financial status. In many cases, borrowers will be surprised that their credit standing is stronger than expected."
So, how do you make sure you have tip-top credit when applying for a mortgage? Here are five strategies that can lead to a faster -- and better -- mortgage credit review.
First, prepare for your mortgage application.
Since 2010, most real estate financing has been in the form of "qualified mortgages," loans that meet the standards outlined by Wall Street Reform. A qualified mortgage -- or QM -- must show that the borrower has the ability to repay the loan.
To meet QM requirements, you can expect lenders to want signed tax returns or W2s for at least the past two years, year-to-date pay stubs from the past 30 days, plus complete copies of all financial statements, usually for at least the last two months. If self-employed, a lender might also want a balance sheet as well as a profit-and-loss statement.
Having such information in hand can greatly speed the mortgage review process.
Second, check your credit report in advance.
The better your credit report, the better your credit score -- thus the reason to check credit reports for errors and outdated items.
Under the Fair and Accurate Credit Transactions Act (FACTA), consumers can get one free copy of their credit report from each of the three nationwide credit reporting agencies every 12 months. This can be done in a few minutes by going to the official website, AnnualCreditReport.com. Print out your report or save it as a PDF.
"Look at your report in advance to make sure it fairly reflects your credit history," says Brousseau. "If you spot items that are inaccurate, you'll want to contact the credit reporting agency. Most negative items -- but not all -- fall off after seven years. Some bankruptcies stay on for 10 years. Check the report to be certain that outdated items are not included."
Third, know how credit scores work.
In basic terms, credit scores weigh the answers to five questions:
- Have you paid bills on time?
- How much of your credit is now in use?
- How long have you had credit and when was the last time you used selected accounts?
- What is your mix of credit card debt, auto loans, student debt, mortgages, etc?
- Have you recently opened additional lines of credit?
"Once a loan application is made most lenders will automatically provide borrowers with a free copy of their credit score," says Brousseau. "A good credit score can greatly help in the application process, and a lower score can often be overcome by selecting a certain type of mortgage product."
Fourth, a lower credit score does not always mean no credit.
Borrowers can readily finance and refinance with an 800 credit score, but it's also true that mortgages are available with lower credit scores. For instance, more than 40 percent of recent FHA borrowers had credit scores between 620 and 680.
Fifth, beware of surprise credit snags.
It used to be that lenders checked credit reports when a loan application was first made and then again just before closing. Now lenders have the ability to even check for daily credit report changes. When new debt or credit lines show up lenders re-calculate the ability of borrowers to qualify for financing.
Brousseau explains that "after a mortgage application is made, borrowers should enter a financial quiet period until closing. During this time, avoid non-essential purchases, stay away from new credit accounts, and ignore offers for higher debt limits. This way you can stave off the problem of 'undisclosed' debt and protect your mortgage application."
Source: Carrington Mortgage Services