How to Avoid the Mortgage Process Pitfalls: Fluctuation in Credit - Part 1

How to avoid common mortgage process pitfalls.  This four-part series discusses awareness and ways to avoid these common pitfalls helping you learn how to avoid falling prey to these potential traps so you can sail through the mortgage process and into your new dream home.

When seeking a home mortgage, the approval process is one of the most crucial factors it also can be one of the most stressful components of the home buying experience. Most homebuyers are aware that credit is an important component of qualifying for a home loan. Credit, along with your income and expenses, and funds available for down payment, dictate the amount you can qualify to spend on a home, as well your interest rate. 

A frequent and unfortunate reality is that buyers will obtain a letter of pre-approval from their lender and proceed to find a home they love that is in their price range. They have their offer accepted and the home under contract. Suddenly, hours before closing, it feels like the rug is being yanked out from under them and they cannot purchase their home because their mortgage is denied.

When a lender uses the term “credit” they are referring to two closely related things: your credit score and your debt-to-income ratio.  A credit score is a three-digit score generated to reflect a consumer’s potential creditworthiness. Debt to income ratio is a ratio of how much money you have going out each in month in expenses relative to the amount you have coming in as income. Lenders have strict thresholds for an acceptable debt to income ratio. When the debt portion of the ratio creeps even a hair over their approved parameter, a loan can be denied.

Any adverse changes in credit situation between the time of loan pre-approval and loan closing can potentially cancel a loan.  These changes can manifest in several different ways effectively lowering your credit score making you now ineligible for your previously pre-qualified loan.  The most common way for this to happen can be by missing or making a late payment on a car, credit card or any account that reports to the national credit bureaus.  Another is by making any purchase on credit may also impact your debt to income ratio.  While a large purchase like a car is obvious and easy to avoid even smaller purchases, like a week’s worth of groceries put on a credit card, can push people that are already towing the debt to income line into a loan denial.

It is important to be mindful of these factors while trying to qualify for and close a home loan. Remember that a “pre-approval” is not a guarantee; there will still be a lengthy qualification process.  Avoid negatively altering your credit situation and stay in touch with your lender to help stay on track, preventing any unnecessary mortgage qualification pitfalls.

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Upcoming Related Posts
Avoiding Mortgage Pitfalls: Part 2 – Building to Code 
Avoiding Mortgage Pitfalls: Part 3 – Are You Getting What You are Paying For
Avoiding Mortgage Pitfalls: Part 4 – Importance of Timing

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