5 Ways to Mess Up Your Mortgage Approval

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5 Ways to Mess Up Your Mortgage Approval

If you have worked hard to overcome your past credit problems in order to purchase a home it can be a huge relief when you finally receive that pre-approval letter from your mortgage loan officer. A pre-approval is your next big step toward purchasing the home you have been dreaming about, but it is not a golden ticket either.

Once you are pre-approved for a mortgage the next step is generally verification (aka underwriting). You will be required to supply a number of documents to your lender in order to verify your income, employment history, and other information which is relevant to your loan. Assuming that you are able to pass successfully through the verification process your loan status should move from "pre-approved" to "approved." 

Yet just because a lender has issued you a pre-approval or even an approval does not mean you are guaranteed financing. There are still a number of ways to mess up your loan before your closing date rolls around. Keep reading for a list of 5 ways to mess up your mortgage approval. Hopefully you will be able to learn from the mistakes of others so that you never have to find yourself in the same unfortunate situation.

1. Apply for or Open New Accounts

Even though your credit was checked as part of the pre-approval process, your lender is most likely going to check your 3 credit reports and scores again prior to closing. They do this in order to be sure you have not experienced a change in "borrower circumstances." If credit or financial changes occur between pre-approval and closing (such as a drop in your credit scores) then you could lose your loan.

Applying for or especially opening new accounts is one potential way to kill your mortgage before you ever make it to the closing table. Having your credit pulled by other lenders has the potential to impact your credit scores negatively. Opening new accounts has the same credit damaging potential. Furthermore, when you open a new credit obligation while your mortgage loan is in underwriting, especially a large obligation like an auto loan, you could raise your debt-to-income (DTI) ratio as well. An increase in DTI could financially disqualify you from closing on your loan even if your credit scores are not an issue.

2. Run Up Your Credit Card Balances

Another potential way to mess up your mortgage closing is to run up your credit card balances. As is the case with opening new accounts, when you run up higher balances on your credit cards you have the potential to both raise your DTI and to lower your credit scores simultaneously. You may not realize it, but your credit card balances have a big influence over your credit scores. As your credit card balances climb your credit scores will generally begin to fall - sometimes significantly. In fact, your credit card balances can have a negative impact upon your credit scores even if you keep your accounts paid on time each and every month.

3. Close a Credit Card Account

When you close a current, positive credit card account that action has the potential to drive your credit scores downward. Closing a credit card does not cause you to lose credit for the age of the account (that is a myth), but a freshly closed account can increase your debt to income ratio. When your debt to income ratio (the connection between your credit card limits and balances) increases, your credit scores will probably be impacted negatively. If your credit scores fall because of a credit card closure then there is a chance you may no longer qualify for the mortgage you had been approved for previously.

4. Pay Off a Collection

You would think that paying off old collection accounts is always a positive move when it comes to your credit scores. However, due to a deficiency in some of the older FICO credit scoring models which are used by mortgage lenders, paying off an old collection can sometimes be interpreted as new derogatory activity. As a result, there are instances when paying off an old collection account could actually have a negative impact upon your FICO credit scores. Even if that impact is only temporary those newly lowered credit scores could be enough to cheat you out of your home loan.

Of course you should not assume that paying legitimate old collections is necessarily a bad idea. However, if you were already approved for a mortgage with those old collections present on your credit reports then you might want to consider waiting until after your home closing before paying or settling any old accounts. (Tip: When the timing is right it is generally best to settle collection accounts in a single, lump sum payment in order to protect yourself from being sued and to potentially save more money as well.)

5. Make Late Payments

Making late payments on any of your credit obligations while your mortgage is in the underwriting process is a huge mistake, a mistake which could easily put the brakes on your home loan. Over 15 years ago, when I first started working in the credit industry, I had a client who was moving from out of state to purchase a new home. During the busyness of the move he forgot to make a tiny, $15 credit card payment. That late payment caused his credit scores to drop over 50 points per credit bureau on average and disqualified him from his home loan.

Thankfully, this story has a happy ending. We were able to assist the client in calling his credit card issuer to request a "goodwill removal" of the late payment. Because he had never made any previous late payments on the account his credit card issuer agreed to remove the new 30 day late from his reports as a one-time courtesy.

Once the late was removed and his credit scores rebounded the client's loan officer was able to reschedule his closing date (albeit at a slightly higher rate due to market fluctuations). Yet many people are not so fortunate when it comes to the goodwill removal of a late payment. This credit mistake has ultimately caused many people to lose their home loan altogether.

The Takeaway

Just because your 3 credit reports and scores were checked by your lender prior to receiving your initial pre-approval does not guarantee you the money in hand to purchase your home. Yet if you can avoid the 5 mistakes above you should have little to worry about, at least from a credit perspective.

Having difficulty qualifying for a mortgage due to credit problems? CLICK HERE  or call 704-499-9696 to schedule a no-obligation credit analysis with our HOPE4USA credit experts.








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Michelle Black is an author and leading credit expert with a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.


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A New Report for Liens and Judgments

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A New Report for Liens and Judgments

As a follower of the HOPE4USA Credit Blog you are already aware of the massive credit reporting changes which are on the horizon. The 3 credit reporting agencies have announced that on July 1, 2017 they will be removing the vast majority of judgments and about half of the tax liens from their consumer credit reports in an effort to comply with the National Consumer Assistance Plan (NCAP). (You can read more about that announcement and what it means for consumers here.)

The removal of so much negative public record information is slated to quickly improve the credit scores of millions of Americans. Many consumers are understandably excited about the forthcoming credit reporting changes. Lenders, however, have been much more apprehensive.

Why Lenders Are Nervous about the Change

The new credit reporting policy, greatly anticipated by many consumers, is actually quite worrisome for lenders. Lenders depend upon credit report data and, by extension, credit scores to help predict risk - the risk of doing business with new applicants. In order to remain profitable lenders cannot issue loans to people who are unlikely to pay back those loans plus the agreed upon interest according to the terms of their agreements.

Public records, like judgments and tax liens, on credit reports and the impact which those public records have upon a consumer's credit scores serve the purpose of helping lenders to predict risk more accurately. In other words, the data helps lenders be more profitable. Since lenders are in business to make a profit, just like everyone else, any tool which helps them to achieve that goal is greatly valued. The removal of so much tax lien and judgment data from credit reports will make an important lender tool (traditional credit reports and credit scores) much less effective.

According to LexisNexis, borrowers with a judgment or tax lien filed against them are twice as likely to default on a loan when compared to consumers without these challenges. Additionally, these same consumers are believed to be 5 and 1/2 times more likely to enter into pre-foreclosure or foreclosure when compared with borrowers who do not have judgment or tax lien records. If you can put yourself into a lender's shoes for a moment then you can understand how the sudden inability to access this predictive information would be unsettling.

Introducing LexisNexis RiskView Liens & Judgments Report

In answer to this newly created need in the lender marketplace, Innovis (sometimes referred to as the 4th national credit reporting agency) has announced a partnership with LexisNexis® Risk Solutions. The 2 companies will be combining their efforts and resources to offer the LexisNexis® RiskView Liens & Judgments Report.

According to LexisNexis the new product will offer lenders "uninterrupted access to...lien and civil judgment data." The new report is being advertised as 99% accurate, with a nationwide network of court runners delivering the most current public record data available. Furthermore, LexisNexis states that the new report, available in July of 2017, will be fully FCRA compliant and will feature a "robust dispute resolution process to help consumers report and correct inaccurate information." Of course, whether or not this so-called "robust" dispute process will improve upon the currently problematic dispute processes in place with most of the consumer reporting agencies remains to be seen. Regardless, the report is being marketed to lenders as a solution to fill the hole which will be left by the removal of so much public record data from traditional credit reports.

Significance for Consumers

At this point predictions are purely speculative of course, but chances are high that a significant number of lenders may choose to take advantage of the new RiskView Liens & Judgments Report. The report has the potential to improve a lender's ability to predict risk. As such, consumers who may have been anticipating that the removal of certain public record information from their credit reports might solve all of their problems may be in for a bit of a letdown. Yet the news is not all bad for consumers either as they will be able to look forward to all of the following:

  • Most judgments and about 1/2 of the tax liens are still going to be removed from the credit reports produced by Equifax, TransUnion, and Experian in July of 2017.
  • The removal of public record information could very likely result in a credit score increase. A consumer may need to pay off a public record in order to qualify for a loan (or for a number of other reasons) of course, but an increase in credit scores could still lead to a number of financial benefits.

To summarize, the removal of a judgment or tax lien is not going to suddenly erase all of a consumer's credit and financial problems, but it is still a small victory for the consumer nonetheless. Additionally, although the details have not yet been released, consumers should have access to a copy of this new liens and judgments report as well as a right afforded to them under the Fair Credit Reporting Act (FCRA). Once the reports are made available it would be wise to request and review your own report to monitor for the errors which are unfortunately far too common among consumer reports. 






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Michelle Black is an author and leading credit expert with a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.


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The Newest Credit Scoring Model: VantageScore 4.0

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The Newest Credit Scoring Model: VantageScore 4.0

It is no secret that FICO is king when it comes to credit scoring models. The vast majority of lenders, most notably those in the mortgage industry, rely either exclusively or at least heavily upon FICO scores as they evaluate the credit worthiness of new applicants for financing. However, with the introduction of VantageScore 4.0 in the fall of 2017 many lenders are starting to pay a bit more attention to this newest arrival to the world of credit scoring.

In truth, VantageScore Solutions (the company which creates and sells VantageScore credit scores) is not so new. It is only new when compared with the Fair Isaac Corporation (FICO). VantageScore Solutions, founded by the 3 major credit reporting agencies themselves in 2006, is actually over a decade old. 

Yet most lenders still prefer FICO scores. FICO was initially founded in 1956 and created its first credit scoring system in 1958. The credit bureaus themselves began to adopt FICO credit bureau risk scores between 1981 (Equifax) and 1991. According to FICO its scores are currently used by 95% of the largest financial institutions in the country.

VantageScore 4.0

Though the company is already dominate in direct-to-consumer credit score sales, VantageScore Solutions has been fighting for over a decade to dip further and further into FICO's lender-purchased credit score market share. This goal is achieved by convincing more and more lenders to purchase VantageScore's credit scores to use for risk analysis in prospecting, account management, and application reviews. The roll out of the 4th generation of its scoring model in the fall of 2017 will be just one more step toward this goal, but might be better described as a giant leap instead of a step.

The reason the release of VantageScore 4.0 is such big news is because it will be the first credit scoring model to consider trended data in the calculation of consumer credit scores.  Trended data, added to credit reports several years ago, allows credit card issuers to report a 24 month history of historical balances and payment amounts made by their customers. This historical data can show future lenders whether you are truly someone who pays off your credit card balances in full each month (aka a transactor) or whether you are in the habit of revolving an outstanding balance from one month to the next (aka a revolver).

Revolvers, especially minimum payers (consumers who only pay the minimum payment due on their credit card bills) represent a higher level of risk to lenders. In fact, according to a study conducted by Experian, minimum payers are 6 times more likely to have a future delinquency than transactors. TransUnion's study on trended data found that revolvers represent between 3 to 5 times more risk than transactors.

Including trended data in VantageScore 4.0 gives this new scoring model increased predictive power over previous generations of VantageScore and, arguably, FICO scoring models as well. In other words, this new scoring model is being touted as a more reliable way to predict credit risk. Predicting risk, after all, is why lenders purchase credit scores in the first place.

Advice for Consumers

Because of recent changes in credit reporting, especially the upcoming removal of many tax liens and judgments from credit reports and the removal of many medical collections as well, lenders and credit score developers are going to begin paying more attention to alternative credit data which is also predictive. It has always been important to pay off your credit card balances in full each month both from a credit scoring perspective and also from a financial perspective as well. However, with the consideration of trended data now in the works the importance of paying off your credit card balances has multiplied exponentially.

Of course implementing a new credit scoring model is very expensive for lenders. Due to the high cost it will likely be years before a majority of lenders begin using VantageScore 4.0. The same can be assumed for any yet unannounced but potentially forthcoming new releases from FICO which consider trended data for that matter.

As a result consumers do not necessarily have to worry about trended data impacting their credit scores for a while. Still, remember that when credit scoring models which consider trended data are finally adopted by lenders those models will be looking back at a 24 month history of your credit card payments. This means that the time to develop the habit of paying off your credit card balances monthly is now.

 





michelle-black-credit-expert

Michelle Black is an author and leading credit expert with over a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.