Credit Do's and Don'ts During The Home Buying Process

One thing that many homebuyers are not aware of is that their credit report will be run at two separate times during the mortgage loan application process. The first credit pull occurs right after the loan officer receives the loan application from the borrower. The loan officer pulls the credit and then uses that information to propose a loan program to the borrower. The second credit pull occurs after the loan officer has submitted the complete loan package to the lender. The lender then pulls a new credit report to verify the credit report previously pulled by the loan officer.

Big problems occur when the lender’s credit pull produces a lower score than the loan officer’s initial credit pull. Lenders have very cut-and-dried guidelines for their loan programs. If the new credit score now falls below the lender’s parameters for that loan program, the lender will usually either reject the loan file or counter-offer with a higher interest rate for the same loan program. This always a bad surprise for both the loan officer and the borrower.

To prevent this common scenario from occurring, borrowers should take definite steps to ensure that their credit scores do not drop during the mortgage approval process. The following is a set of Do’s and Don’t’s for borrowers before and during the mortgage approval process.

Do take a look at your credit well in advance of beginning the mortgage application process. You can pull your credit report for free at www.annualcreditreport.com. This will allow you time to correct any mistakes that appear on your credit report before you begin the mortgage application process. If you wait until you have already submitted a loan application, it may be too late to correct any problems in time.

Do keep your credit card utilization around 25%. This seems to be optimal level for the credit scoring programs. You do not have to keep your revolving credit utilization at that level all the time. The only time to be concerned is when the loan officer and, later, the lender pull your credit. A credit report only shows a snap shot of your credit utilization at the time of credit pull. Having maxed out credit card two months prior won’t hurt you as long as your credit card utilization is down to around 25% on the day of credit pull. Having a revolving credit utilization of 50% or more on the day of credit pull really hurts the credit score. Credit utilization of more than 70% can drop the credit score by more than 100 points. Your credit card utilization is not instantaneously reported to the three credit bureaus that create your credit score. Get your credit card utilization to around 25% no later than one full month before your credit will be pulled.

Don’t close out old credit cards for new ones that offer a better rate. The average length of time that you have held your credit cards is an important part of your credit score. Closing out old cards reduces the average length of time that you have been extended credit, and thus reduces your credit score. Keep the old cards open.

Don’t apply for any new credit of any kind during the mortgage approval process. Each time you apply for credit, your credit score will be run. Each new credit inquiry will reduce your credit score by at least 5 points. Depending on the circumstances, some credit inquires can reduce your existing credit score by up to 40 points.

Don’t pay off collections or charge-offs. Doing so will create recent activity on derogatory accounts. Any recent activity on any derogatory account, no matter what kind of activity, will lower your credit score. If you are going to payoff a collection or charged-off account, have the loan officer arrange to do this during the close of escrow of your loan.

Do make sure that you make all of your bill payments on time before and during the mortgage approval process. One recent 30-day late on a credit card can drastically lower a credit score.

Do follow your loan officer’s advice concerning your credit. Most loan officers are very knowledgeable regarding credit reports and credit issues. Let us help you to maximize your credit score before, during, and after the mortgage loan application process.

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