January 27, 2022
You may have heard advice about seeking new credit while you are in the home loan process. Much of this advice is definitely applicable.
Anyone who advises you NOT to apply for new credit once you have started your home loan journey is thinking with your best interests in mind, but what is it about this advice that makes it so critical?
A lender doesn’t pull your credit reports just once during the home loan process and if your lender sees new information that potentially changes your ability to qualify for the mortgage it may be necessary to re-approve you for the loan.
And that’s just the presence of new credit in your report. What about how a new line of credit potentially affects your debt-to-income ratio?
When you apply for any major loan, your debt-to-income ratio will be an important factor in loan approval. The lender needs to know that the borrower can afford their current financial obligations each month AND the new proposed mortgage loan payment in addition to those other payments.
What percentage of your income is taken up by bill payments each month?
That is going to be complicated by those who apply for new credit in the meantime. And what about a borrower’s potential future debt? Does your lender need to be concerned? It’s an important factor to remember.
And it’s not just new credit lines you have been approved for–your lender can see when you have applied for other credit just by checking the number of credit inquiries in your credit report and the dates of those inquiries.
If your loan officer discovers recent inquiries for a line of credit that is not yet on the credit report (the payments haven’t started yet) what is the loan officer’s duty as she processes an FHA loan application? HUD 4000.1, the FHA Lender’s Handbook, says:
“The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios.”
“The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrowers required funds to close on the Property being purchased.”
And what does the FHA consider to be a material inquiry? That is a very important detail to consider. “Material Inquiries refer to inquires which may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries.”
And there are other reasons why the lender needs to check on credit-related issues. FHA loan rules state you cannot pay your down payment with unapproved sources of funds including cash advances on a credit card. If your lender finds evidence in your credit report that you took a recent cash advance, that may complicate your loan approval process.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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