Over my 25 years as a loan officer, I have worked with a number of clients who were confident that they were ready to buy a home but ended up being surprised when I brought up issues either with their income, assets, or credit history. Sometimes these issues were relatively easy to fix and other times it took as long as two years to get the client to where she could qualify. More often than not, the problems were able to be fixed in 6 months or less but when you want to buy a home right now, that can seem like an eternity. I’ve had clients who said they didn’t plan to make their home purchase for a year or so but then found the perfect home for them when searching on the internet and decided they wanted to buy right then – some were ready to go and the approval process was fast and smooth (even late on a Saturday night) while others had unexpected problems.
Regardless of the kind of loan a buyer is getting, the higher the credit score the better – especially where conventional loans are concerned. Even FHA and VA loans can be denied when a credit score doesn’t meet underwriting guidelines by investors or when it leads to secondary challenges like much higher rates or down payment requirements that make it impossible for the client to qualify. The obvious thing that brings a credit score down is a late payment. The more recent the late payment is, the more negatively it impacts the score. The more delinquent a late payment is (60 days late vs. 30 days) the more adversely the score is impacted. In these situations, assuming the report is accurate, time heals all wounds. An on-time payment history for a year since a 30-day late pay will do a lot to bring the credit score back up.
A less well-known thing that can hurt a buyer’s credit score is having high balances relative to credit limits on revolving debt. This is especially easy to do when the account has a low limit. Many first time homebuyers are new to credit and may have accounts with $500 or $1,000 credit limits and it doesn’t take much to throw the ratio out of balance. A $300 balance on a card with a $500 limit has a 60% usage rate – 30% and below are much better for a credit score. If the buyer has had a card for a while, even 6 months in many instances, a call to the creditor asking for a limit increase can do wonders for the credit score.
New accounts and credit inquiries are other things that drag scores down. Accounts less than 6 months old typically negatively impact credit scores. It usually takes a year before accounts positively impact the score. People who have lots of credit inquiries over the last 90 days will also have a much lower score than if they had no credit inquiries or just a couple. Additionally, sometimes there are inaccuracies on a person’s report that can hurt their credit score and while these are usually fixable, it does take time and sometimes it’s longer than a client wants / needs or thinks is reasonable. The earlier we are aware of any of these things that are hurting a client’s score, the more time we have to get these issues fixed and their score up to where they need to be so that they can get the best program with the best rate. When I talk about rate, credit score doesn’t only impact the interest rate, it is also a factor in determining the mortgage insurance rate for conventional loans.
Calculating income isn’t always as straight forward as borrowers would like, whether they are W-2 wage earners or self employed. I have had many borrowers who are employed who make good money but we can’t always use all the money they make to qualify them since most underwriting guidelines require a two year history of overtime or bonuses in order to use that income. Additionally, buyers who augment their income with a part-time job have the benefit of being able to save money for a down payment faster but unless they have worked that part-time job for two years, underwriting guidelines typically don’t allow us to use it for qualifying purposes (ie calculating the debt ratio).
For self-employed borrowers it can get even trickier. A few years ago I had a client who owned a laundry mat and a couple of investment properties. When I asked her what her monthly income was, she said $26,000. At that level, she had no problem qualifying for the beautiful new house she was looking to purchase. When I got her tax returns, the actual income was much different. She had given me the top-line revenue (revenue is not income) for her laundry mat and her investment properties. There were lots of expenses for all three of her properties including a mortgage on each, property taxes, insurance, maintenance / repair, and depreciation (an add-back) to name a few. Her laundry mat had a few other expenses as well. Ultimately I calculated her actual income to be just under $12,000 per month. Luckily she still qualified but this is another example of why I don’t write approval letters until I have reviewed the supporting income and asset documentation in addition to their credit report.
This is usually the least likely to have any issues of the three things that can have unexpected surprises for people but there are some things that can trip up a file. Last fall I had a client who was really a good client for an FHA loan. He had several years on his job as a union construction worker and he had decent credit even though he only had two accounts. This would have been a slam dunk if we could just verify his rental history. The big problem was that he cashed his paychecks (pro tip: ALWAYS DEPOSIT YOUR PAYCHECKS). This was the start of a major problem that ended up requiring him to get a co-borrower. The issue was that we couldn’t verify his rental payment history. Had he been renting from a place that was managed by a professional property manager, we could have used a verification of rent from them for his rental history even though he was paying his rent in cash. However, he was renting from his brother (renting from a private party, related or not, requires that we can verify rent by showing the history via canceled checks or a similar method). My client had no inkling that this would be an issue or he would have handled it differently.
I had one client who paid his rent in cash and we verified that he made his rent payments on time because he would deposit his pay checks and then take out the money needed for his rent – it wasn’t always exactly the same amount but it was close enough to the $800 rent payment that the underwriter signed off (the borrower wrote an explanation letter that he would sometimes take out extra money for groceries or entertainment in addition to the $800 for his rent).
Many of the challenges noted above are easy to fix and don’t require much time (almost always one year or less and in many cases, just a couple of months). It’s important that potential buyers get pre-approved almost as soon as the thought pops into their head that they want to buy a home, even if they don’t think it will be for a year. If they get pre-approved and don’t actually buy for a year, we will obviously require updated documentation including a new credit report (hopefully they still have good credit), new tax returns and W-2s, pay stubs, and bank statements but at least they knew from the original approval that they were ready to go. For others that have some kind of challenge, it is better to find out now so that they can start working on getting it fixed than it is to try to get pre-approved 6 months from now when they find a home they love and have to have it but miss out because it will take 3 months correcting the problem they didn’t know they had. I’m happy to help with a pre-approval and make sure that there is nothing that will prevent a buyer from buying right now…and if there is, I’ll give them a plan to fix the issue(s) so that they can be ready to buy as soon as possible.