Navigating New Credit During the Home Buying Process
Understanding the Impact of New Credit on Home Buying
It happens more times than not. A homebuyer is in the middle of buying a house, and they come across a great deal, something they would love to have in their new home. Maybe it’s a dining room table set, master bedroom furniture, or a giant 80” tv.
But, they’ve forgotten about the mortgage process because they are living their daily lives. Who doesn’t want to get a smokin’ deal on a new couch or anything really?
I know I’m always looking for ways to save money all the time.
However, it is highly recommended to not open any new credit during the mortgage process. Whether or not a borrower heeds that recommendation is an entirely different matter.
You can’t blame people when they are going about their busy lives and just forget about things. We are all human, right!?
Now, it’s not a bad thing if you do happen to slip up and open new credit. Yes, it’s a pain in the butt, but it doesn’t mean you can’t still get your dream home. It just means you need to provide more documentation to your loan officer in order to close on your loan.
From a loan officers perspective, they have to account for the new debt calculated into your debt-to-income ratio. Usually, if the payment is small on the new debt, it probably won’t have that much of an effect.
But, again, it means more paperwork on your end of things. The documents your loan officer could look for are:
An account statement. You may not have one if you just opened the account, which leads us to No. 2 on this list.
A receipt of the transaction, which was used to open up the new line of credit. This will provide at least what the balance is and possibly what kind of interest you’d be paying to help the loan officer calculate the monthly payment.
It is ok if you happen to open up a store credit card. These don’t tend to have high monthly payments, which in turn won’t affect that debt-to-income ratio (DTI).
The worst kind of new credit to open would be a new car loan. Those are a nightmare waiting to happen. Yes, things happen and a car breaks down, but what are you supposed to do?
The mortgage process is already stressful enough. Now, add in a car payment that wasn’t expected, it becomes even more stressful.
Car loans, relatively, have high monthly payments, which can, in turn, take an ok situation with the DTI into a severe situation. Again, what are you supposed to do, you need to be able to get to work in order to afford that dream home.
Loan officers are always trying to take the most stress out of the mortgage process for their clients. That doesn’t happen when clients get frustrated because they are asked for all this documentation associated with newly credit opened.
This is also highly frustrating for the loan officer because they know if that client had not gone and opened up that new credit card, they wouldn’t be in this situation. Many loan officers have already seen this situation played out before. They usually can get a game plan together to ease that burden.
For example, there was a recent borrower, who opened a new credit card to take advantage of 0% interest. Who can blame him? They transferred the balance from one credit card to the new one to take advantage of the no interest offer, thus creating another monthly obligation to an already tight DTI.
With the monthly payment of the new card added, the borrower’s DTI was out of the loan program’s guidelines, which made him ineligible for the loan type. The loan officer sprang into action asking questions about the other debts already reporting on the borrower’s credit.
When the loan officer got his answers, the borrower’s one card had the monthly payment dropped by nearly $140. It was that change that allowed the borrower’s DTI fall back into an acceptable ratio and the loan closed.
Opening up credit is only one thing that can be detrimental to your mortgage. Here are what we like to call the 10 Commandments of the Mortgage Process. Follow these when applying for a mortgage to make sure your loan doesn’t fall apart.
The Ten Mortgage Commandments
- Thou shalt not change jobs, become self-employed or quit your job
- Thou shalt not buy a car, truck, or van (or you may be living it) ?
- Thou shalt not use credit cards excessively or let current accounts fall behind
- Thou shalt not spend money you have set aside for closing
- Thou shalt not omit debts, liabilities, or information from your loan application
- Thou shalt not request a refund for your appraisal once the appraiser has done their job
- Thou shalt not originate any new inquiries into your credit – I know I said it was ok to break this one ?
- Thou shalt not make any large deposits without checking with your loan officer
- Thou shalt not change bank accounts
- Thou shalt not co-sign a loan for anyone
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