Mortgage Approval Process
Having good credit, good income, and assets are the key ingredients for a mortgage loan approval and most home buyers with these three key factors will qualify for a mortgage loan and have no problem in going through a smooth mortgage approval process. However, there are things during the mortgage approval process that can halt the mortgage approval process which can cause delays and major headaches. Your credit report may contain items that can halt the mortgage approval process. There are also other factors that can halt the mortgage approval process such as recent overdrafts in bank statements, disputing derogatory credit items, and those who quit their jobs prior to closing on their mortgage loan.
Credit Disputes On Your Credit Report
You can have perfect credit on your credit report but if you have a credit dispute with a credit balance of $1,000 or more that is a non-medical collection account, this will halt the mortgage approval process and your file will be placed on suspense. HUD and Fannie Mae guidelines are strict when it comes to credit disputes, no matter how long a collection account is. Your mortgage approval process will be halted until you either pay off the credit dispute or have the credit dispute retracted. It takes time to retract a credit dispute but your mortgage lender can do it faster via a rapid rescore which can be quite costly. A rapid rescore costs $30 per credit bureau so each credit dispute retraction will cost you $90 if your dispute is with the three major credit bureaus. If you have multiple credit disputes, it can add up.
A major problem with retracting a credit dispute is that it will lower your credit scores. This can be a problem for borderline credit mortgage loan applicants where a drop can mean that they might no longer qualify for a mortgage loan program. Disputes with medical collections or non-medical collections without a balance are exempt from this rule.
Overdrafts In Bank Statements
Most mortgage lenders will deny a mortgage loan application if the mortgage loan applicant has had overdrafts in their bank statements in the past 12 months. Mortgage lenders will require 60 days of bank statements and will ask you for updated bank statements throughout the mortgage approval process and prior to the mortgage loan underwriter issuing a clear to close. An overdraft in your updated bank statement can be cause for a mortgage loan denial. Even a $5 dollar overdraft is considered serious. Make sure you monitor your bank account during the mortgage approval process and have overdraft protection placed on your checking accounts.
New Credit Accounts And Credit Inquiries
Your mortgage lender will do a soft credit pull prior to issuing a clear to close. If you have been applying for new credit after you have submitted your official mortgage application, credit inquiries will show on your credit report. Every credit inquiry will show a red flag and if the mortgage loan underwriter is about to issue a clear to close and does a quick soft credit pull but a bunch of credit inquiries show up on your credit report, you will need to write a letter of explanation on each credit inquiry. This will cause a delay on you getting a clear to close issued. If you purchased new items such as a car or furniture, this new debt will need to be added in your debt to income ratio calculations. New monthly payments added can make your debt to income ratios exceed the maximum permitted and can be a reason for a mortgage loan denial. Do not apply for new credit nor make any purchases such as an automobile purchase or furniture purchase during the mortgage loan approval process.
Late Payments And Public Records Popping Up Prior To Soft Credit Pull
There are times where an old collection account or a judgment that has not been recorded shows up when the mortgage loan underwriter does a soft credit pull. If this happens, the issue needs to be fixed before the mortgage loan underwriter can proceed in issuing a clear to close. The old collection account is not a problem if the balance is under $1,000. If the balance is over $1,000, 5% of the balance will be used to calculate the debt to income ratio. Collection accounts do not have to be paid but new FHA guidelines require that non-medical collection accounts with balance of $1,000 or more that the mortgage underwriter take 5% of the unpaid balance towards calculation of the debt to income ratios. If the mortgage loan applicant can get a written payment agreement that is less than 5% of the unpaid balance of the collection account, the new minimum payment agreement will be used in lieu of the 5% with no seasoning requirement.
Your credit scores can drop during the mortgage approval process and your intial credit scores will be used until your mortgage loan is closed. However, there can be issues if your mortgage loan underwriter does a soft credit pull prior to issuing a clear to close and they see recent late payments that have been recorded after your mortgage loan application and credit report have been submitted. This will definitely be an issue. You need to religiously pay all of your monthly payments until you close on your mortgage loan.