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Mistakes Home Buyers Make Prior To Qualifying For Mortgage

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Biggest Mistakes Home Buyers Make Prior To Qualifying For Mortgage

This Blog On Mistakes Home Buyers Make Prior To Qualifying For Mortgage Was UPDATED On December 16th, 2018

One of the top mistakes home buyers make prior to qualifying for mortgage is not preparing for their home purchase way ahead of time.

  • All home buyers, especially first time home buyers, should prepare well ahead of time in getting their credit scores as high as possible
  • Qualifying for a mortgage is one thing
  • Getting the best mortgage rates depends primarily on the borrowers credit scores
  • Lenders base mortgage rates primarily on credit scores with government loans such as FHA, VA, and USDA Loans
  • The higher the borrower’s credit scores, the lower the mortgage rates
  • With Conventional Loans, there are more factors that determine mortgage rates besides just credit scores
  • Factors that affect mortgage rates on Conventional Loans are:
    • credit scores
    • type of property
    • down payment
  • Home buyers should realize that a higher credit score will mean lower mortgage rates
  • It will yield lower monthly payments which translates into monthly savings on interest expense
  • The savings from lower interest rates means thousands of dollars in savings over the term of the loan
  • Most borrowers choose a 30 year fixed rate mortgage loan
  • A $50 reduction in monthly mortgage payments due to the borrower getting a lower mortgage rate due to having a higher credit score means a total savings of $18,000 over the course of a 30 year mortgage loan

Mortgage Credit Scores Explained

One of the biggest mistakes home buyers make prior to qualifying for mortgage is not paying attention to their credit scores before applying for a mortgage.

  • Lenders use the FICO 2 model
  • When a borrower applies for a mortgage, the loan officer will pull a tri-merger credit report from the three credit bureaus:
    • Experian
    • Equifax
    • Transunion
  • Lenders will use the middle credit score
  • For example, here is a case scenario:
    • if the borrower has a 500 Transunion
    • 600 Experian
    • 700 Equifax credit score
    • Lender will use the 600 Experian credit score
    • This is since Experian score of 600 FICO is the middle credit score

Importance Of Credit Scores In Underwriting

The FICO credit scoring system was created and launched by Fair Isaac and Company

  • FICO credit scoring model eliminates and filters out irrelevant factors that do not pertain to the borrower’s credit and payment pattern and history such as the following:
    • the borrower’s race as well as the borrower’s gender
  • The purpose of the FICO credit scoring model is to determine the credit risk of  borrower as follows:
    • by taking account the overall credit profile of the borrower
    • by taking into account the borrower’s overall credit history
    • longevity of the credit tradelines
    • available credit available on revolving credit accounts
    • type of credit the borrower has
    • amount and pattern of the credit inquiries
  • The higher the borrower’s credit scores are, the lower the risk level the borrower is to the creditor and/or lender
  • Since the risk level is lower with borrowers with higher credit scores, lenders will offer lower mortgage rates

Avoiding Mistakes Home Buyers Make With Credit Scores

There are ways of avoiding mistakes home buyers make prior to qualifying for mortgage with not having regard to their credit scores.

  • Many home buyers think that just because they meet the minimum credit score requirements for a FHA Loan or Conventional Loan, they are home free and do not have to worry about their credit scores
  • This is not true
  • Just because a borrower meets the minimum credit score requirement does not mean that they have a guaranteed mortgage approval
  • For example, the minimum credit score required to qualify for a 3.5% down payment FHA Loan is 580 FICO
  • However, lenders will also review the overall borrower’s payment history
  • Especially the borrower’s payment pattern for the past 12 months
  • Most lenders will not approve a borrower that has any 30 day late payment in the past 12 months
  • Some lenders may allow one late payment in the past 12 months
  • However, the borrower need to have been timely in the past 6 months
  • Late payments or derogatory information on a borrower’s credit report will not affect the borrower’s mortgage rates

Major Mistakes Home Buyers Make After Bankruptcy And Foreclosure

Majority of lenders will automatically disqualify borrowers who had any late payments after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.

  • One late payment after a bankruptcy and/or foreclosure can mean that they may not be eligible to qualify for a home loan
  • This holds true no matter how high their credit scores are
  • Lenders consider borrowers who have late payments after bankruptcy and/or foreclosure a second offender
  • They take even one late payment after a bankruptcy or foreclosure very seriously
  • It can be a $5 dollar minimum credit card late payment
  • Amount of the minimum payment does not matter
  • A late payment after bankruptcy or foreclosure is still considered a second offender
  • Could be grounds for not qualifying for a home loan no matter how high the borrower’s credit scores are
  • Make sure to keep track on the date due for all creditors
  • Always double check and triple check to have sufficient funds on bank account
  • Make sure there are no shortage of funds where minimum payment due will not be paid

Higher Credit Scores Means Lower Mortgage Rates

If you are planning on buying a home, start preparing to maximize your credit score several months beforehand.

  • Check your credit scores and your overall credit report
  • The best credit website that will get you the closest credit score as the credit scores mortgage lenders use is www.myFICO.com
  • This website gives consumers access to their FICO credit score from the three credit reporting agencies as well as the consumer’s credit report
  • The website will also offer special services such as the FICO credit improvement simulator
  • It will advice the consumer on what to do to maximize their FICO credit scores
  • The website may advice the consumer to pay down a particular credit card
  • Or to leave a certain balance on a particular credit card
  • Leaving a small balance on credit card yields the highest FICO credit score
  • All lenders have pricing adjustments on mortgage rates based on credit scores
  • Mistakes home buyers make prior to qualifying for mortgage is not paying attention to the mortgage rates they are quoted

Impact On Mortgage Rates Versus Credit Scores

Rates are based on current credit score versus the mortgage rates they can get quoted with a higher credit score:

  • Pricing on mortgage rates below 640 FICO can be very high versus pricing rates higher than 640
  • Many borrowers who have credit scores under 640 FICO can easily get their credit score over 640 just by paying down a credit card
  • Most mortgage companies have tiered pricing hits every 20 FICO Points
  • For example, to get the best possible mortgage rates, borrowers would need a 740 credit score
  • Every 20 FICO Point drop means a higher mortgage rates
  • In general, there are huge pricing adjustments for credit scores below 640
  • Borrowers with credit scores under 620 FICO may not just get a high mortgage rate, but may also be charged discount points
  • Try to avoid making mistakes home buyers prior to qualifying for mortgage, pay all of monthly debts on time
  • Maximizing credit scores months before putting an offer on a home is a must for higher scores

Late Payments After Housing Event And Bankruptcy

Home buyers need to realize that by taking the extra time in preparing themselves to get the highest possible credit scores:

  • This could mean thousands of dollars in savings over the course of their 30 year fixed rate mortgage loan
  • All consumers need to realize that one late payment on a credit report will remain on a consumer’s credit report for seven years from the date of last activity
  • Most lenders will not qualify borrowers with any late payments after a bankruptcy or foreclosure for seven years

One 30 day late payment after bankruptcy and foreclosure means not being able to qualify for a mortgage for many years after the late payment. If you run into a situation where you got late payments after bankruptcy, please contact Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com.

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