Published July 09, 2013
As home prices continue to rise and mortgage rates creep above 4%, home buyers are jumping into the market as sellers move off the sidelines. But strict lending standards have complicated the home-buying process.
Even if you have the down payment for a new house, that might not be enough to move into your dream house. Despite the uptick in the housing market, banks are using much more stringent standards when making a mortgage loan.
It’s not just the expected problems like late payments, charge-offs, collection accounts or judgments against you that can prevent securing a mortgage. More common events might stop you from making your dream home become a reality.
Here are 10 events that can hurt your credit score and how to prevent them:
Your credit has been checked too often. Applying for credit cards or loans can shave precious points off your credit score. And if you’re close to the threshold between a “good” or “fair” credit score, even a few points can be the difference between qualifying for a loan.
To be safe, hold off applying for anything for six months before applying for mortgage.
Applying or obtaining new credit while in escrow. Fannie Mae now requires lenders to run a new credit report just prior to loan funding. So if you open a new credit card or finance furniture for your new digs before closing, expect to provide a good explanation and possibly have the deal fall through.
Not having credit. Pre-bubble days no credit was considered good credit, but in today's market, a lender needs to see that a home buyer has a history of managing credit obligations. If you are new to the credit market and do not have a long enough credit/payment history, you may not be able to get a mortgage.
Not having PMI. Qualifying for a mortgage isn’t the only approval you need. If your down payment isn’t 20% of the purchase price, you’re going to need private mortgage insurance (PMI). PMI is generally required by lenders as a means of protection in the vent you default on the loan. But just because you qualify for a mortgage, doesn’t mean you’ll qualify for PMI; these companies run their own credit check and assess credit worthiness independent of the mortgage lender.
Lack of reserves. Mortgage lenders like to ensure borrower has proper reserves (savings account, IRA, 401(k), stocks, etc.) in case of a physical issue with the house or loss of the borrower's job. And inadequate reserves kill many loans.
Appraisal issues. The price negotiations aren’t necessarily over just because the buyer and seller agree on a price. In an unstable market, an agreed upon price may be more than the appraised value of the home. It that’s the case a buyer has to cough up more cash for the down payment to maintain the proper loan to value ratio.
Your available credit to debt ratio is too high. The preferred credit to debt ratio varies by lender, but tends to hover around approximately 36%. If your credit to debt ratio is higher than this amount, it is wise to pay your cards down to this level or expect to be denied a mortgage.
You have been the victim of identity theft. Applying for a mortgage could tip you off that your information has been used to open fraudulent credit accounts that were probably not paid. If you are a victim of identity theft, notify the police, the credit bureaus and creditors immediately and advise them of what has happened in order to begin the process of cleaning these fraudulent items off of your credit reports.
You may not have been at your job long enough. Potential lenders want to know you have a stable income and the ability to pay your mortgage payment along with your other obligations. So if you just started a new job, you might have to wait three to six months (maybe longer depending on credit history, etc.) before putting in a purchase offer.
You only have one type of credit history. If you only have a department store credit card or one consumer credit card, lenders won’t be convinced you can aptly handle a budget. They want to see diversity (car loan, a store card and a credit card) to assess your full potential as a debtor lender.
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