Don't Wave Your Dream Home Goodbye: Beware of These Credit Report Red Flags
On the hunt for a new home? While your overall credit score is a good snapshot of who you are as a borrower, getting a mortgage is more than just crunching numbers a computer kicks out -- lenders will be going over your credit report with a fine-tooth comb. According to Seth Asher Rabinowitz, CEO of MyLoanMarket.com, many homebuyers aren't even aware of the "human review" component of a loan underwriter. It is this person's
According to Seth Asher Rabinowitz, CEO of MyLoanMarket.com, many homebuyers aren't even aware of the "human review" component of a loan underwriter. It is this person's job to look for derogatory entries in your credit report that a computer may not weigh as heavily. Here are some of those red flags that can stick out and lower your home-buying power.
You're Maxed Out
A credit score under 740 can cost hundreds if not thousands of dollars at the time of application in fees and/or higher interest expense over the life of the loan, says Jay Dacey, a mortgage planner with MN Real Estate Loans in the Twin Cities. If your zero percent credit cards are maxed out, it is nearly impossible to stay over that 740 mark even if you've never been late on a payment. The moral of the story: Don't trip over nickels to pick up pennies, says Dacey. Having zero percent on your TV, laptop, or couch so you can make one percent on your savings account is not worth it when you go to get a mortgage and pay through the teeth because you thought you were "sticking it to the bank" on your zero percent card.
You're Not Quite Credit-Worthy
Late payments speak volumes on your credit report. While a "late" is reflected in your overall score and indicated when a reviewer looks at all the accounts, all late payments are not created equal, says Rabinowitz. A late to a cell phone carrier isn't as alarming as a mortgage late, but a mortgage late takes the prize for being the biggest and brightest glowing red flag. Consequences for lates, such as "in default," "serious delinquency," and "foreclosure," are visible to anyone reading your credit report. Each of these categorizations would be serious red flags and more than likely eliminate the possibility of a traditional lender or bank making a mortgage loan in these troubled times, says Rabinowitz.
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Lesser-known red flags on a credit report are real estate tax liens from the federal or your state/local government, says Rabinowitz. Lending underwriters might ask themselves, "Well, if this potential borrower can't pay the tax bill on the previous property, how can we safely extend credit on a new one?" Rabinowitz's advice: Verify that the tax lien on your report is, in fact, not a mistake, as many are. If it is an error, seek help to get it removed through the process, or research how to do it on your own. If it's not an error, you'll have no choice but to pay off the tax lien. If you can't wait for it to come off the report "naturally," proactively try to get it removed.
You've Bottomed Out
Sure, it looks bad in the eyes of a lender to have legally declared yourself financially insolvent, but a bankruptcy doesn't necessarily reduce your home-owning hopes to rubble. "Bankruptcies on a credit report do have impact for up to 10 years," says Eric T. Mitchell, managing partner of National Credit Associates in Sherman Oaks, California. "However, FHA loans allow for a new mortgage once the bankruptcy has been discharged for two years." They will even allow a new mortgage one year after a bankruptcy if it was caused by a hardship as opposed to financial mismanagement. Even better, FHA allows for a new mortgage for people still in a Chapter 13 bankruptcy as long as the most recent 12 months trustee payments have been timely made. There's a 3.5 percent down payment and you only need to display that you can truly afford the monthly payments. Fannie Mae and Freddie Mac do require the bankruptcy to be discharged up to five years to be considered for new financing.
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More non-traditional items are showing up on credit reports, says Rodney Anderson, a mortgage and credit expert from Plano, Texas. These days, it's not just traditional creditors and medical organizations that are reporting past due and collection accounts. Municipalities are also reporting overdue fees and fines to the credit bureaus for unpaid items like parking tickets and even past due library accounts. The best thing borrowers can do is find out what their credit reports say prior to entering a transaction. Becoming aware of your credit situation puts you in the position of control.
Your Happy Ending
This is a great time to buy a house, says certified financial planner, Christine D Moriarty, president of MoneyPeace, Inc. Despite your red flags you can own a new home, as long as you're armed with the facts about your finances and committed to making the necessary changes. "I usually tell couples to start to prepare for the house hunt and mortgage search a year beforehand," says Moriarty. So the faster you find the potential red flags on your credit report, the longer you have to correct them and clear the way to a happy closing.