How a fully approved loan gets denied for funding after the borrower has signed loan docs.
Underwriter views an updated credit report verifying no new activity since original approval was issued and the new debt disqualifies the buyer(s).
Generally this won’t happen in a 30 day time-frame, but borrowers
should anticipate a new credit report being pulled if the time from an
original credit report to funding is more than 60 days.
Purchases involving short sales or foreclosures tend to drag on for several months, so this approval / denial scenario is common.
It’s An Ugly Cycle
- First Time Home Buyer receives an approval
- Thinks everything is done
- Makes a credit impacting decision (applies for a loan on a new car, furniture or runs up credit card balance)
- Funder gets new credit report, sees any of these scenarios and denies the loan
In the hopes of stemming the senseless slaughter of perfectly acceptable approvals, we’ve developed a “Ten credit do’s and don’ts” list to help ensure a smoother loan process.
These tips don’t encompass everything a borrower can do prior to and after the Pre approval process, however they’re a good representation of the things most likely to help and hurt an approval.
DO continue making your mortgage or rent payments
Remember, you’re trying to buy or refinance your home – one of the first things a lender looks for is responsible payment patterns on your current housing situation.
Even if you plan on closing in the middle of the month or have already given notice, continue paying that rent until you’ve signed your final loan documents
DO stay current on all accounts
Much like the first item, the same goes for your other types of accounts (student loans, credit cards, etc).
Nothing can derail a loan approval faster than a late payment coming in the middle of the loan process.
DON’T make a major purchase (car, boat, big-screen TV, etc…)
This one gets borrowers in trouble more than any other item.
A simple tip: wait until the loan is closed before buying that new car, boat, or TV.
DON’T buy any furniture
This is similar to the previous, but deserves it’s own category as it gets many borrowers in trouble (especially First Time Home Buyers). Remember, you’ll have plenty of time to decorate your new home (or spend on your line of credit) AFTER the loan closes.
DON’T open a new credit card
Opening a new credit card dings your credit by adding an
additional inquiry to your score, and it may change the mix of credit
types within your report (i.e. credit cards, student loans, etc).
Both of these can have a negative impact on your score, and could result in a denial if things are already tight.
DON’T close any credit card accounts
The reverse of the previous item is also true. Closing
accounts can have a negative impact on your score (for one – it
decreases your capacity which accounts for 30% of your score).
DON’T open a new cell phone account
Cell phone companies pull your credit when you open a new
account. If you’re on the border credit-wise, that inquiry could drop
your score enough to impact your rate or cause a denial.
DON’T consolidate your debt onto 1 or 2 cards
We’ve already established that additional credit inquiries will hurt your score, but consolidating your credit will also diminish your capacity (the amount of credit you have available) resulting in another hit to your credit.
DON’T pay off collections
Sometimes a lender will require you to pay of a collection prior to closing your loan; other times they will not. Pay off collections when necessary to ensure a loan approval. Otherwise, needlessly paying off collections could have a negative impact on your score. Consult your loan professional prior to paying off any accounts.
DON’T take out a new loan
This goes for car loans, student loans, additional credit cards, lines of credit, and any other type of loan. Taking out a new loan can have a negative impact on your credit, but also looks bad to underwriters and investors alike.
Follow these Do’s and Don’ts for a smoother mortgage approval and funding process.
Remember the simple tip: wait until AFTER the loan closes for any major purchases, loans, consolidations, and new accounts.
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Thanks for the very good tips. These are good tips to increase your credit score as well as getting a loan.
Good information for the potential borrower - never can say this enough!
Hi Nevin, A great reminder for all buyers! I have had buyers tell me that they had decided to buy a truck during escrow so they could move less expensively. I was glad they mentioned it before they did it. I was able to stop them from making a big mistake. I thought I had warned them about doing something like that, but they had "forgotten."
Great list on DON'Ts I heard a tale from a broker some years ago. Buyer had marginal credit, was advised not to get the car she wanted until AFTER she closed. Well, she didn't buy a car on credit . . .she LEASED a car (on credit). Her loan was denied.
Nevin....Great outline for buyers ... Buyers do need some guidance in their management of credit
Thank You
Lori - Thanks for stopping by!
Nicholas - No we can't! Buyers lose loans very quickly this way
Susan - So many things to remember I tell ya!
Carla - Nice that people use common sense. Geez...
Robert - Yes they do! How about you bring them lobsters over here and let's cook 'em!