Each lender and each loan program has different guidelines that must be followed. A good rule to follow (from a consumer stand point) is to not do anything that will have an adverse effect on your credit score while in the loan process. We know it can sometimes be tempting, especially when buying a new home because you are thinking about new appliances and/or furniture. This is not the best time to go shopping with your credit cards. For now, you will want to remain in a stable position until the loan closes AND funds.
When you are looking to purchase a home or refinance your existing mortgage, there are key things you should and should NOT do during the loan process.
DON'T Apply For New Credit Of Any Kind - Its normal to receive letters in the mail which invite you to apply for new credit and even more often you receive a letter that reads ‘Pre-Approved'. Don't respond to these letters. If you do apply to these companies (even the Pre-Approved letters) they will pull your credit. Each time you pull your credit, if could effect your scores. When your FICO score is above 800, then an inquiry may not be a problem. But for FICO scores at 681, it could bring your score down to 679 which can make a world of difference when it comes to mortgage products. As mentioned above, you should also not establish new lines of credit for appliances, furniture, computers, etc.
DON'T Pay Off Collections Or Charge-offs - If you are working with a Loan Originator and are actively working on your past due debt to improve your credit score, this rule may not apply. However, if you completed a loan application and are actively moving forward with your mortgage, its best to not touch Collections or Charge-offs. Paying off one of these accounts could have a serious effect on your FICO score, even though its being paid off. In some cases, the Charge-off or Collection may be old and has already done the damage to your FICO score. There are some cases where a lender may request/require you to pay off a specific account, but wait for that request before doing so.
DON'T Close Credit Card Accounts - When you close a credit card account (especially one that is paid off) it can affect your ratio of ‘debt-to-available-credit' which is a 30% factor when calculating your credit score. In addition, this could affect your credit history which is another 15% of your credit score factor. If you really want to close your account, do so after your loan has funded. Also, when considering closing more than one account, you may want to spread it out over a few months. Close one or two this month, then another one or two in another two months, etc. Do your best not to close a large number of accounts at once.
DON'T Max Out Or Over Charge Existing Cards - This is the number one way to drop your credit scores and is certainly the fastest way. Charging up a card could drop your score as much as 100 points (depending on open lines, history, etc). It is best to keep you credit card balances at approx 30% of your credit limit, especially after you start the mortgage process.
DON'T Raise Red Flags To The Underwriter - Don't co-sign on another persons loan, which includes a mortgage, auto loan, personal loan, etc. When you co-sign for another person, that item still appears on your credit report. This could have an effect on your credit two ways. The first way is that it could bring down your scores if the other person makes their payment late or fails to make the payment at all. The second way is that it may affect your Debt-To-Income ratio which could disqualify you from receiving a mortgage. There may be ways to prove the debt is not yours and that it is being paid by another person, but there is not guarantee that the proof provided will be sufficient. It is best to avoid this scenario, if possible.
DO Stay Current On Existing Accounts - Making late payments to your auto loan, credit card, and especially your current mortgage may be reported to the Credit Reporting Agencies (CRA) which can cost you dearly. One 30 day delinquent can cost you anywhere from 15-100 points on your credit score (depends on the open lines, history, and other factors).
DO Join A Credit Watch Program - Perhaps your bank, credit union, or credit card company will offer this program to you. Typically there is a charge for this service, but it keeps you up to date on where your credit stands and will alert you of any major changes.
The main key here is that once you have entered into an application for a mortgage, it is typically best not do anything that could drastically change your credit scores. Some lenders are requiring a new credit report prior to funding the loan to ensure nothing has changed or been added to your credit report. Wait to make any changes after your loan has funded, and even after the funding, use your best judgment when making credit decisions.
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