You’ve applied for a mortgage loan for that must-have dream home for you and your loved ones. Everything will be perfect. You can already imagine that beautiful spring weekend when you move in and can settle into your castle. Then you get a phone call from your loan officer: “We just ran your credit and need to change the terms of your loan.” These are not words you want to hear, especially since you obtained a pre-approval and thought your credit was fine. So what is going on??
The scenario above is one which is becoming more commonplace, even with increased government regulation on how creditors report to the three credit bureaus. The most important fact to remember is credit scoring is not static -- it is always changing. The following are a few pointers for people applying for mortgage loans (as well as applying for auto, personal, business or student loans):
Be Careful How Many Times Your Credit Is Run
If you go shopping for a mortgage pre-approval, expect the lending institution to require all three of your credit scores be run. The reason is simple: they cannot issue the pre-approval letter without all of this information. Anyone who tells you differently is mistaken.
What happens if you choose a different lender than the folks who issued the pre-approval? The new company will need to run your credit again. Because credit scores are fluid, the more lenders involved means the more your scores are run; the more your scores are run, the more the terms of your loan may vary.
My advice: try to use one lender to do both; (a) provide you with a pre-approval; and (b) issue the loan. That is not to say you should use the first and only lender with whom you talk. Rather, do your research, study the facts and select the best fit for you before authorizing your credit to be run.
Your Lender May Run Your Credit Twice Before You Close
This is a more recent industry trend: lenders have clamped down on borrowers who take advantage of knowing their credit will only be run once to buy big ticket items between the application and closing. If you are looking to furnish that dream home with no payment until next year, think again!
My advice: Wait until your loan has closed to do any additional financing. When your loan is in process, the lending institution will almost always pull your credit twice to discover if you have incurred any additional debt during the application process. If you have, not only will the lender require proof of financing terms, but they will also now factor that new debt into your overall obligations, necessitating additional underwriting. Even if you have no payment until next year, the lender must estimate a monthly payment, so be careful and play it safe. These changes, along with the additional credit inquiry, will almost always lead to a lower score, which can lead to a lender increasing the interest rate.
Lenders Are Raising The Bar
Lending institutions are raising the minimum credit score requirement to obtain their best interest rates. Most FHA, VA, and some Conventional loan programs will go as low as a 620 credit score to obtain a loan approval, but the best interest rates don’t start until you get to 700 or even higher. This means that a 680 credit score doesn’t hold the same amount of importance as it once did; now a 720 is required. As more and more borrowers become aware of the importance of good credit, lenders have raised their credit standards.
My advice: pay attention to your spending habits and know how they affect your credit score, both positively and negatively. There are many professionals and complimentary services available to you at Chicago Patrolmen’s Federal Credit Union. In addition to providing competitive lending programs, we also work with members to help understand and manage their financial needs and increase their credit score.
The most important things to take from this quick study are when applying for a mortgage loan, be aware that your credit score will likely be run more than once, and disclose up front to your loan officer if you plan on financing anything between the time you apply and the time that you close. This way you can rest assured your dream home can become a reality!
This article was written by John Aretos, CEO, First Chicago Mortgage Services, a wholly owned subsidiary of Chicago Patrolmen’s Federal Credit Union.
For more information or to discuss your mortgage needs, contact John by calling 312.499.8878 or emailing firstname.lastname@example.org.
This article was originally published in FOP 7 Chicago magazine.