As I tell my clients…once your lender has issued a Pre-Approval Letter, DO NOT do anything that will affect your credit unless directed by your lender (ex: pay off or close accounts).
I once had a home listed for sale in Loganville, Georgia and the buyer had to terminate the contract because the wife applied for a store credit card to save 20% on her purchase that day. That measly savings, cost her family their dream home!
The following are some helpful tips to avoid credit mistakes that many borrowers make during the loan process.
- DON’T APPLY FOR NEW CREDIT OF ANY KIND, including those “You have been pre-approved” credit card invitations that you receive in the mail. Every time that you have your credit pulled by a potential creditor or lender, you lose points from you credit score immediately. Depending on the elements in your credit report, you could lose anywhere from 2 to 50 points for one hard inquiry.
- DON’T PAY OFF COLLECTIONS OR CHARGE-OFFS during the loan process. Paying collections will decrease the credit score immediately due to the date of last activity becoming recent. If you want to pay off old accounts, do it through closing and make sure that you validate that the debt is yours and that the creditor agrees to give you a letter of deletion.
- DON’T CLOSE CREDIT CARD ACCOUNTS. If you close a credit card account it will appear to the FICO that your debt ratio has gone up. Also, closing a card will affect other factors in the score such as length of credit history. If you have to close a credit card account, do it after closing and make sure the account is not recent.
- DON’T MAX OUT OR OVER-CHARGE YOUR CREDIT CARDS. This is the fastest way to bring your score down 50 to 100 points immediately. Try to keep your credit balances below 30% of their available limit at all times during the loan process. If you decide to pay down balances, do it across the board – make an extra payment on all of your cards at the same time.
- DON’T CONSOLIDATE YOUR DEBT ONTO ONE OR TWO CREDIT CARDS. It seems like it would be the smart thing to do; however, when you consolidate all of your debt onto one card, it appears that you are maxed out on that card and the system will penalize you as mentioned above in question number 4. If you want to save money on interest rates wait until after closing.
- DON’T DO ANYTHING TO CAUSE A RED FLAG TO BE RAISED BY THE SCORING SYSTEM. This would include adding new accounts, co-signing a loan, changing your name or address with the bureaus. The less activities on your reports during the loan process, the better.
- DON’T ALLOW OVERDRAFT FEES AND INSUFFICIENT FUNDS TO HAPPEN. These type of bank charges can sway your loan from being approved to denial. Keep bank accounts balanced to avoid your loan being denied.
- DO JOIN A CREDIT WATCH PROGRAM. If you join a credit watch program, you can check your reports weekly or even daily depending on the program you select. When you pull your own reports you do not get dinged for a hard inquiry. This way if something does show up that makes your score go down, you will know immediately and may be able to take care of the issue before closing.
- DO STAY CURRENT ON EXISTING ACCOUNTS like your mortgage and car payment. One 30-day late payment can cost you anywhere from 30 to 75 points.
- DO CONTINUE TO USE YOUR CREDIT AS NORMAL. Red flags are raised easily in the scoring system. If you are changing your pattern, it will raise a red flag and your score could go down.
- DO CALL YOUR LOAN ORIGINATOR if you receive something in the mail from a creditor or collection agency that you believe may affect your score during the loan process. Your lender may be able to supply you with the resources you need to stop any derogatory reporting to the bureaus.
Thanks to Vicky Samuels, the mortgage professional that shared these tips with me!
If you are looking to buy your 1st home or move up into a bigger home, whether you are buying new construction or resale, contact me.
I offer 2 complimentary consultations to ensure you get started correctly and get to the closing table!
info@SOLDbyNat[dot]com or 404-857-2508
Here is another CREDIT related post you may be interested in: When You CAN’T EVEN Get Approved for a Rental