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critical credit decisions that can make or break your home loan

Critical Credit Decisions That Can Make or Break Your Home Loan

Don’t Be Surprised

When applying for a home loan, your credit is one of the most important factors in determining the cost, and terms of your financing.

You could meet all other qualifying criteria, like employment, income, and assets, and yet a critical credit decision can prevent you from getting the best loan you could qualify for.

You can avoid dangerous mistakes, make last-minute improvements, and put yourself in the driver’s seat when you understand these basic rules of credit repair and preservation.

Being an empowered consumer means being proactive and responsive from pre-approval through to the close of escrow. The surest way to avoid surprises is to ask a lot of questions and do your homework.

How Credit Scoring Models Work

Consumer credit scoring models like CreditKarma differ significantly from the scoring models that most lenders use to underwrite a home loan.  Even the scores you order directly from Experian, Trans Union, or Equifax can vary greatly from a tri-merged mortgage credit report.

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Here is a great resource from CreditKnocks.com – How to Get Your Free Credit Score – The Definitive Guide

Mortgage lenders use credit services companies that provide credit reports, as well as a wide variety of services such as rapid re-scoring, credit line updates, third-party verification services, which are often used correct an item that is reporting inaccurately on your report.

Credit services companies can use different scoring models as well.  The result is that different lenders may be showing different credit profiles and different credit scores.

My experience is that this difference is minimal, and the chances of multiple mortgage lenders using the same credit scoring model is very, very high.

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When checking your credit scores, your credit profile is analyzed at the time it is pulled.  Liabilities report on different cycles, meaning your score is always fluid, and can change from one day to another.

Tips for Increasing Credit Scores

Understanding the basics of how credit scoring models work will make it easier for you modify your credit management efforts, and put yourself in the best possible position for borrowing money at lowest cost and interest rates available.

Here are some simple tips and strategies for increasing your credit scores.

Long Term Credit Score Improvement Strategies

Length of time credit has been established – While not a major factor in your credit score, the highest credit scores are earned by those that have managed excellent credit for an extended period of time.

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Pay all of your bills on time – The single best practice you can have is to pay all of your reported liabilities on time.  Late payments in the past 12 months will significantly pull down your scores.

Do not close credit lines – It is not always a good idea to close revolving credit lines (credit cards) that you no longer use.  There is a point where you have too much revolving debt, and canceling some credit cards closed is a good long term strategy.  As a best practice, you should avoid cancelling cards, just pay them down to a zero balance and let them stay open.

Short Term Credit Score Improvement Strategies

Identify inaccurate reporting – It is not uncommon for credit reports to contain reporting errors.  A lender’s tri-merge report will report a derogatory even if it shows up on only one of the three credit bureaus. Identify, and correct inaccuracies as early as you can.

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www.OptOutPrescreen.com – Pre-approved credit card or auto loan offers happen when credit reporting agencies sell your information to creditors.  OptOutPrescreen is how you opt-out of those credit pre-approved offers.  By preventing credit card companies from monitoring your credit, you can increase your credit score between 10-15 points in as little as 10 to 14 days.

Pay down revolving credit – One of the quickest ways to raise your credit scores is to pay down revolving credit lines (credit cards) to less than 30% of the high credit limit.  This strategy can move your credit scores as much as 75 points or more in as little as 5 to 7 days.

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Critical Mistakes that Can Hurt Your Credit

Disputing credit lines – Many credit repair services will begin disputing items on your credit report in an effort to get inaccurate items removed.  A disputed credit line is removed from the credit scoring model, and will not be used to calculate your credit score.  The trap that most people fall into is disputing everything, even if it is reporting accurately.  A lender will not be able to give you a loan approval if you have disputed items on your credit report.

Closing revolving credit lines – It would make sense that if you had an issue in the past with a credit card, or if you have not used a certain credit card for a long period of time, you would just cancel the card and be done with it.  Closing revolving credit lines will negatively impact your credit scores in the short run.  If you pay a credit card off, simply leave it be.  It will benefit you more in the long run by establishing longevity, and depth of your credit history.

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Paying off collections or charge-offs – One of the biggest mistakes you can make, and I still hear of lenders recommending this, is to pay off collections or charge-offs.  By paying an aged collection account, you are actually updating the date associated with the derogatory account, making it a current derogatory account, and reducing your credit score. In most cases, collections do not need to to be paid in order to qualify for a home loan.

Charge offs are typically not considered by an underwriter, or the automated underwriting system and should never be paid off.  Charge offs have been written off by the creditor and they are no longer attempting to collect the debt.

Being Prepared

Unless you know for sure that your credit is immaculate, it’s not a bad idea to start early in the pre-approval process and have your credit run as soon as you can, as a starting point.  Many loan officers have extensive experience working with credit issues, big and small.

If you are working with a lender that does not clearly explain your credit challenges or does not offer some road map to building up your credit scores, you may want to look for a loan officer that is willing to work as hard as you to get you into a position to buy.

There are many loan officers that think it’s a waste of their time to help you get into the best position to buy, at the lowest rate and cost.  They are more concerned about their next commission than they are about your best interest.

Credit Questions or Comments

Do you have burning questions about your credit, or how your credit may be affecting your ability to get the best financing now?  Please ask your questions below and I will be happy to help.


About Your Expert

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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