August 12, 2020
Why is credit monitoring, credit repair, and credit utilization so important for the purposes of getting a home loan approved?
This is a serious question all borrowers should ask ahead of their loan application. It’s just as important to know the hows and whys of addressing your credit scores and history–and the question should be addressed long before applying for a major line of credit like a construction loan to build on your own land, or the purchase of a condo or suburban home.
A participating FHA lender is required to make each loan applicant can realistically afford the home loan. For loan approval, your credit history must have patterns that indicate that you will pay on time and generally behave like a good credit risk.
Approving a home loan application means looking for patterns of reliability. This can be interpreted as simply your credit use, payment, and history over the long-term.
Some loan applicants don’t understand what the lender is looking for, but if you start to think like a lender, the process becomes easier to understand. It’s a matter of how the lender must read and interpret the data in your credit reports.
Loan Officers Reviewing Your Credit Reports Look For…
Your lender needs to be able to show that an applicant comes to the FHA home loan process with a consistent pattern of paying on time, every time over a long stretch of time.
How much time?–more than a full year. A single late or missed payment may or may not be cause for concern, but if the borrower can explain this as an isolated incident, there may be room to negotiate.
How many loan officers do you know who will justify approving a loan if there is a pattern of late or missed payments?
Credit repair 101 advice here includes establishing an on-time payment record for all financial obligations. Do this over the long term–for at least a full year ahead of the application.
Credit Use Counts
Some applicants create problems for the lender who struggles to approve a home loan; some of these applicants have credit reports with evidence of a large number of credit accounts, or a smaller number of credit accounts that are at or close to the maximum balance.
Imagine working as a loan officer; what would it be like to get a loan applicant’s credit report knowing you have to justify the loan as a good credit risk? Credit Repair 101 includes reducing your credit account balances. Below 50% is good, 30% or lower is best.
The Takeaway
Your lender wants to help you get a mortgage, but the loan officer is bound to make sure the loan is a good one, that the borrower won’t default, and that the credit risk is acceptable. The borrower’s part in all this? Making sure to pay attention to credit issues like those discussed above.
Take time to address your monthly payments, work to lower your credit card balances, and you are using proven methods to improve your credit.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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