After you’ve applied for a mortgage…..
There are many misconceptions about credit. ‘Less is more’ or ‘more is more’? Neither is necessarily true. There are several factors in credit. Of course, the age-old “five C’s of credit” come into play.
- Character (Your Credit score, trustworthiness, financial history, etc)
- Condition (The economic conditions at the time)
- Captial (How much money you have set aside)
- Collateral (What assets are used as security?)
- Capacity (Can you afford it?)
But let’s dive into the credit portion. How do I avoid issues after I’m approved for a loan?
Think of your credit score as a business’s feedback system. If the feedback is true; some people will say good things about you—You’ve paid your bills. If you forget to pay a bill one month, that will show on your credit bureau as negative feedback. We all understand that it’s easy to get negative feedback, but it takes a lot of positive to bolster a business’ reputation—and we need those positive marks on our credit report!
Federal guidelines state that an entity (person) borrowing money can be leveraged up to 31% for housing debt and a total of 43% for an FHA loan. *
What may surprise you is how that is calculated. That 43% is inclusive of debt you don’t owe but could borrow against.
Typically, we do not carry our open-ended credit lines with a full balance.
For example: Lines of credit, and credit cards may have a credit limit of $5,000 (or more) but you only owe $700. So, which balance is calculated in the debt to income ratio? The amount of the payment owed if the card was “maxed out”; $5,000.
Once credit approved, let the sleeping dog lie. Just let him sleep!
Seriously. Don’t touch anything.
- Close debts (This is a long-term harm to your credit score, if you’re currently credit approved, because you no long have someone saying good things about you.)
- Open new credit cards (Every hit to your credit can cost you 3- 7+ points. It takes a full cycle to recover 7 points– up to 90days)
- Apply for overdraft protection (Again– a credit hit!)
- Open a new bank account (This is a “soft hit” but it’s still an inquiry!)
- Buy a new car
- Order furniture and finance it (Because even 90 days same as cash will be a hard hit to your credit score)
- Deposit cash. (Your lender has to account for every dollar, and this will cause a red flag situation when credit & income is verified again just before closing.)
- Continue as you always have— be mindful of your credit.
- Pay all your bills on time—this includes any debt you are consolidating through the home or paying off in the sale of your previous home.
- Wait to make large purchases until after you close
- Wait to apply for credit until your escrow closes. (Any time you have to provide your social security number—your credit score could be affected. Walk away until after your purchase closes.)
“But my banker told me to pay down or lower credit limits… what now?”
If your loan officer has told you that you’re credit approved, but it might be a good idea to call and get your limits lowered, they are likely to ask, later, for proof that it’s been done. Your debtors will provide it in writing; or you should be able to print online statements showing the reduced limit.
“Why would they tell me to do this!?”
It’s likely you are at, or close to, the 43% Federal maximum. If something happens in the loan process, and you need to borrow more against the mortgage (Even closing fees could cause the DTI to rise over the 43%) it’s important to have that leeway in your debt structure.
*Source: FHA Handbook 2019 version
This is not indicative of credit management outside of a mortgage loan application process. This blog post is not to be considered financial advice. Please consult with your lender and/or financial advisor/cpa/attorney for the specifics of your own situation.