One Of Your Credit Limits Decreased
When a lender or credit card issuer decreases your credit limit, this could also increase your credit utilization ratio and lower your credit score. To illustrate how this works, lets say your current credit balance is $3,000 and your total credit limit is $10,000. Based on those numbers, your credit utilization ratio would be 30% .
However, if one of your creditors decided to decrease one of your credit limits by $2,000 and your balance remained at $3,000, it would increase your credit utilization ratio to 37.5% .
In this situation, you could ask the lender to raise your credit limit to lower your utilization ratio. If that doesnt work, an alternative solution would be to pay down your current balance.
Get A Copy Of Your Credit Reference File
You can ask for a copy of your credit reference file from any of the credit reference agencies. If you have been refused credit, you can find out from the creditor which credit reference agency they used to make their decision. Your file shows your personal details such as your name and address, as well as your current credit commitments and payment records.
You have a right to see your credit reference file – known as a statutory credit report. A credit reference agency must give it to you for free if you ask for it.
If you sign up to a free trial and decide its not right for you, remember to cancel before the trial ends or you might be charged.
You Have Too Much Debt
As part of the underwriting process, lenders will look at your debt-to-income ratio, or DTI. This ratio reflects how much of your income goes towards debt each month. Its calculated by dividing your total monthly debt payments by your income.
Even if you were preapproved, your mortgage application could be denied if you took out new debt or if your income dropped, both of which can affect your DTI. If you have a spouse or partner who is applying for the loan with you, their DTI will also play a role in whether the loan is approved.
If your debt-to-income ratio is a problem, you can either pay off some of your debt, try to raise your income, or change who will be listed on the mortgage to get your DTI below the thresholds for mortgage approval.
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Why Lenders Pull Credit Again
There is often a long lapse of time between when you apply for a mortgage and when you actually close. If it is a purchase, you could be looking at as long as six months before you close. That is a long time to let your credit go unchecked. What if you racked up your credit card bills when you purchased furniture for the home? What if your car broke down and was unfixable and you had to purchase a new car? These things might not make you unable to afford the mortgage, but they definitely affect your debt ratio. If your ratio is beyond the recommended guidelines for the loan program, the lender has to pull their approval. If they dont, they could be on the hook with the overseeing agency, such as Fannie Mae or Freddie Mac. Lenders are held responsible with the new regulations, such as the Dodd-Frank Act and the Ability-to-Repay Rule.
As You Pay Down Your Mortgage
In the long run, having a mortgage and paying it off as agreed can help you build a stronger credit profile.
A study by LendingTree found that U.S. borrowers saw an average credit score drop of 20.4 points after getting a mortgage. It took an average of 165 days after closing for credit scores to reach their low points, and another 174 to rebound. In total, the decline and rebound averaged 339 daysjust shy of a year.
While your score will likely drop initially, a track record of on-time monthly payments on the sizable loan will help to improve your score and trustworthiness as a borrower.
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When Is The Last Credit Check Before Closing
Typically, the final mortgage approval before closing occurs in the week leading up to the closing. Lenders will check the borrowers credit report to verify any critical financial details.
If the lender spots any big purchases that significantly impact your financial picture, it’s possible they won’t finalize the mortgage. With that, it is important to wait until after closing day before making any big purchases.
You Become An Attractive Buyer
There are two types of real estate markets when youre looking to purchase a home the sellers market and the buyers market. In the sellers market, there is a high demand for real estate properties but the supply is low. Meanwhile, in a buyers market, the supply is high but the demand for properties is low.
If youre thinking of buying in a sellers market, having a mortgage pre-approval letter on hand gives you an advantage over other buyers who dont have one. Theres a higher chance that the seller will go with your offer since you pose a lesser risk that the deal will fall through due to insufficient money.
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Mortgage Deposits And Fraudulent Activity Flagged By Underwriters
Be prepared to answer questions about your transactions as well as provide evidence about the source of your deposit. If youve saved it yourself, lenders can prefer to see a steady transfer of deposits to a savings account or regular accumulation of money in your current account.
If youve received a gifted deposit, you will likely need to provide a letter from the person who gave you the money, as proof that the money is not a loan and that the person gifting it understands that it does not entitle them to any ownership of the property being purchased.
Inaccurate Information On Your Credit Reports
Sometimes creditors make credit reporting errors. Because of this, its a good idea to review each one of your reports from the three major credit bureausEquifax, Experian and TransUnion. You can view all three of your reports for free weekly through April 20, 2022 by visiting AnnualCreditReport.com.
While reviewing your reports, check to make sure your accounts and personal information are correct. If you spot an error, dispute it with each credit bureau that lists it online, by mail or phone. Also, keep in mind that if you see an account that you never opened, it could be a sign you are a victim of identity theft.
If you believe someone has stolen your identity, file a report with the Federal Trade Commission through IdentityTheft.gov and freeze your credit with all three credit bureaus as soon as possible .
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Correcting Credit Report Errors
You can and should check yourcredit report before buying a house. Consumers can get one free credit reportper year on annualcreditreport.com.
In the event that you find errors on your credit report, take steps to correct them as quickly as possible.
First, contact the creditbureaus about the errors. You should also contact whichever creditors haveprovided the erroneous information.
Under the Fair CreditReporting Act, each of these parties is responsible for correcting inaccurateor incomplete information in your credit report.
For simplicity, disputes canbe managed online. If all three bureaus report the same error, though, rememberto report the error to all three bureaus. Equifax, Experian, and TransUnion donot share such information with each other.
The law requires creditbureaus to investigate the items in question, usually within 30 days, unlessyour dispute is considered frivolous. Note that you may need to includecopies of documents which support your position. Never send originals!
Within 45 days, the creditbureaus will notify you with the results of the investigation.
Then, youll want to obtain a new copy of your credit report in order to make sure that the errors have been corrected before applying for a mortgage.
It Changes Your Credit
Occasionally, credit scores are reverified by the underwriter. If the credit report on file expires prior to closing, your lender will need to pull a new report. So, if the underwriter sees a new debt or change in your credit that wasnt there before, they may hold your loan for further review and conditioning.
Throughout the loan process, Mortgage Bankers are notified when new credit accounts are opened. Once they know about them, they must get the details of the debt and add it to your current liabilities on the application. This could cause problems with the debt-to-income ratio and, potentially, means youll no longer qualify.
At Atlantic Bay, we perform whats known as Upfront Underwriting. That means youll get conditional approval for the exact dollar amount you qualify for prior to making an offer on a home. Any alterations to your credit could invalidate that number.
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How Often Does An Underwriter Deny A Loan
You may be wondering how often an underwriter denies a loan. According to the mortgage data firm HSH.com, about 8% of mortgage applications are denied, though denial rates vary by location. While FHA loans have different requirements that may make getting the loan easier, an underwriter may still deny an FHA loan for the same reasons they deny other loan types.
When You Receive Conditional Approval
At this stage, youll likely be asked to provide more documentation. Make sure you respond to these requests as fast as possible to keep the process going. The underwriter cannot proceed until you turn in the requested documents. Make sure youre open and honest about any issues that come up.
During this crucial time, you dont want to do anything that could put your loan in jeopardy, so you should continue to make all of your payments on time refrain from making large, questionable deposits avoid taking out any loans and stay away from using credit to make big purchases.
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Your Down Payment Is Too Small
Lenders generally require a down payment to lower their risk. A down payment improves the loan-to-value, or LTV, ratio, which measures the amount of your mortgage to the homes appraised value. Each type of mortgage has its own requirements for LTV ratios. For example, first-time homebuyers can get a Federal Housing Loan loan with an LTV ratio of up to 96.5%, which means you’ll need to put at least 3.5% down.
Your mortgage application could be denied if it does not meet the LTV requirements. To avoid this problem, you can save up more money for a down payment or find another source to help increase your down payment, such as a gift from a family member. Or, you could look for a less-expensive home to buy.
You could explore loans designed for first-time homebuyers that may have lower LTV requirements and require smaller down payments.
Re: Mid Score Dropped 11 Points Before Closing
Speaking with your LO or Broker is recommended in my opinion. They usually know if the lender being used for your loan pulls another credit report. They can also give their opinion if it will cause issues with that lender since your credit score dropped if they pull another report.
YMMV with different lenders on the outcome, but you may feel more comfortable knowing in advance instead of the day of closing.
Confusing in that you are saying that an old paid collection is re-reporting. The collection being paid or not paid makes no difference as far as reporting is concerned. Was the collection removed from reports because of an agreement in writing for a PFD ? Was the collection removed because of time elapsed ? Was it removed because of disputes? Why was the collection removed to begin with?
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Can A Contingency Sale Cause A Denial At Closing
Buying a property while simultaneously selling another property is called a contingent sale. For any of the reasons above, the buyers sale could be denied. There are many other reasons that the sale could be delayed. When the buyers purchase depends on the other sale, the risks are much higher. For this reason, especially in hot markets, sellers will not accept a contingency sale.
Protect Your Credit Score During The Mortgage Process
Many mortgage applicants make the mistake of believing that once the lender has their credit report they are home free. Thats just not true. Refinancing borrowers should be especially careful. Home purchases have tight deadlines, so refinances can have lower priority and take longer when lenders get busy. If your refinance takes a few weeks longer than expected, youll get a new credit report and potentially a new set of problems. Similarly, if your new home is under construction, your closing date might be very changeable. You dont want to be three weeks out from closing and have a new credit report turn up problems.
Heres how to protect your credit during the mortgage process:
- Avoid applying for new credit no furniture for the new home, no new car, no increase in credit limits.
- Do not increase your credit balances.
- Pay every account on time. Set up automatic payments if this is an issue for you.
- Payment history comprises 35% of your credit score and one missed payment can take off 60-120 points!
- If you have old collection accounts, do not contact the creditor, dispute the balance or have any activity at all because old accounts get less weight in scoring models.
- Any activity on the account can make it new again.
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Mortgage Lenders Look For Inquiries When They Pull Credit
One last thing lenders look for when they pull credit prior to the closing is how many inquiries you have on your report. Inquiries are other lenders who pulled your credit in the interest of either increasing your existing credit lines or extending new credit. Even if you dont have any new credit lines reporting, the inquiries may hurt you. The lender may require a written explanation for these inquiries. They may also need extra time to determine if you had any new credit extended to you. Because it sometimes takes a little while for new credit to show up on a report, the lender has to proceed with caution. If they provide you with the mortgage knowing there was a chance you had new debt out there, they could end up stuck with the loan on their own portfolio because no one on the secondary market will purchase it any longer.
In order to prevent any issues with your credit, dont make any changes before you close on your loan. Any purchases you need to make can wait. If you cannot pay cash, then consider yourself unable to afford it at the moment. This way you take away any risk of your credit score changing for the worse. Also, avoid any other inquiries with any lenders. Even if the inquiry is literally just an inquiry and you are not serious about another loan, dont take the chance. Every lender handles these situations differently. Some will take your word for it that you didnt open anything new, while others will delay the closing until they have concrete answers.
Its Never A Good Feeling To See That Your Credit Scores Have Dropped Since You Last Checked But Being Able To Quickly Identify The Cause Can Help You Take The Right Steps To Get Them Back On Track
Credit scores can drop due to a variety of reasons, including late or missed payments, changes to your credit utilization rate, a change in your credit mix, closing older accounts , or applying for new credit accounts. And dont forget that credit report inaccuracies due to mistakes or identity theft can also cause a dip.
Lets look at the nine main reasons why your credit scores might have dropped, and how you can address each of them.
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Concealing Something About Your Credit History
If youve forgotten about some previous bad credit that is still looming on your credit report and you havent told your lender, this could be considered as concealing your credit history by providing false information.
Always be open and honest about your credit history to prevent delays or a mortgage rejection.
There may be a route for you to improve your credit history if needs be, in order to position yourself as a trustworthy borrower.
We have some short guides that include steps you can take to improve your chances of being approved for a mortgage:
Paying Cash Is Not The Solution
Even if you pay for furniture before closing with cash, your loan could still be in danger. Dont forget about the savings you need for your down payment and closing costs! VA and USDA loans are 100% financed, but other loan types require you to pay a percentage of the down payment upfront . And closing costs, or settlement costs, for any loan are the charges from your lender for the services they provided. Read our article on the two upfront costs you may see.
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What You Can Do To Keep The Underwriting Process On Track
How responsive you are can affect the underwriting timeline. If your lender requests updated bank statements or pay stubs, and you dont submit those for several days, that will slow down the underwriting process.
Here are some tips for doing your part to keep the underwriting process on track: