July 11th, 2014
You’re found the house. You’ve made an offer, and now you’re in the middle of the mortgage application process. There are some things you can do to help move it along, and there are things that will derail it quickly.
Even if you’re pre-approved, you still have to go through the underwriting process, and these three mistakes will slow that down.
It’s best to hold off opening up a new line of credit after you’ve submitted your application because it changes your debt-to-income ratios as well as causes your credit score to dip. If your credit score is on a border and it dips below that threshold, you may not get a good interest rate, and that also will affect your debt-to-income ratio.
But what do you do if your car breaks down, or you’re in an accident and your car is totaled, and you need a new car pronto? Or you had to access money from your current home’s equity line to repair a burst water pipe.
The bottom line is that if you do have to take on new debt, inform your loan officer immediately about it as well as provide the supporting documentation to show how much, who the new lender is, what are the terms, etc. They will get the information to the underwriters and help keep the application on track.
Underwriters also look at total debt as well as potential debt. If you have all of your credit cards close to or maxed out, that will count against you quite a bit. This also wreaks havoc on all three of your credit scores the mortgage lender looks at, especially if each account reports to each of the three major credit reporting agencies.
A better way to manage a higher debt load is to spread the debt over multiple cards if you have them. If you don’t, now is not the time to apply for more. By reducing the balance per card or consolidating the debts into one new account with a high credit limit, you look better to the lender. Consumers should limit debt to no more than 30% of the total allowable credit line at any given point in time if they want to maximize their credit score potential.
You finally get a good look at your credit report and see a mistake. The first thing you think about is to dispute it. That would have been a good plan before you were in the application process. Once you’re in it, disputing a mistake slows down if not derails your mortgage application. The problem is that when you dispute, it moves the account to the dispute status, changing the credit reporting to “in dispute.”
Mortgage lenders use what’s called an automated underwriting system, which is an algorithm that reviews a borrower’s total on-paper financial picture. The automated underwriting system used by lenders will ignore any accounts in dispute. This causes a problem because it doesn’t provide an accurate rating of your true credit picture.
To fix this, you would have to call the creditor and remove the account from dispute status. Then your lender would rerun the automated underwriting to ensure the loan gets approved in the system. Unfortunately, the credit bureaus are not fast at resolving anything.
So plan ahead at least 90 days before you intend to apply. If you can’t, and the dispute is minor, hold off on disputing. If it’s major, talk with your loan officer about options.