Check Your Credit Report Before You Get a Mortgage
This week’s financial tips are based on a recent personal experience as the seller of a house in New Jersey. Less than one week before the scheduled closing, I received word that my home buyers were switching from a pre-approved conventional mortgage to an FHA mortgage. I thought to myself: “who changes mortgages at the 11thhour and pays for additional appraisals and fees? More importantly, why?”
I soon found out that my home buyers’ mortgage company did a final credit check and found an unpaid lien in their name. Either it was a new lien or the lender did not find it before. I don’t know. The lender then disqualified them from the pre-approved conventional mortgage because no lender will lend money for a house that can be subsequently encumbered by a borrower’s old creditors. The buyers subsequently paid off the lien but, in doing so, spent most of their down payment. They have already spent thousands of dollars to apply for a loan, inspect my house, well, and septic system, and test for radon.
After paying off the lien, my home buyers no longer had enough cash to make a 10% down payment so they are seeking a lower down payment through a FHA loan, which requires only 3.5% down with a FICO credit score of at least 580. I did the math and the difference between a 10% and 3.5% down payment on my house is $18,665. The flip side is that their mortgage will now be $18,665 higher than previously planned and they will have to pay an upfront FHA mortgage insurance premium of 1.75% of the home loan, regardless of credit score, ($5,022.50 in this case) and monthly mortgage insurance payments for the life of the FHA loan. With a conventional mortgage, mortgage insurance (PMI) ceases when 20% equity is achieved.
Here are three take-aways from my situation for people who are buying and selling homes:
¨ A Mortgage Pre-Approval is NOT a Guarantee– New credit checks with negative data and newly incurred debts by home buyers can make their pre-approved mortgages null and void. Home sellers need to be prepared for this possibility. I wasn’t, but, ironically, the delay actually benefited me by staying in my house longer and saving on hotel costs.
¨ Check Your Credit Report BEFORE Applying for a Mortgage– Assuming the lien wasn’t new, the buyers could have found it and addressed it before applying for a pre-approved mortgage. Ditto when a home buyer finds evidence of identity theft. Finding the lien and paying it off would probably have delayed their home purchase timeline a bit by stretching out the time needed to save down payment money. However, they would not have had to desperately try to salvage their loan by piling on additional debt and mortgage insurance fees.
¨ Don’t Mess Up Your Credit Before the Closing- Credit histories need to be positive and stable between mortgage pre-approval and the closing. They will be checked again by lenders as my buyers’ were. This means no new car loans or leases, big ticket purchases, late payments, or other actions that lower a credit score. My buyers (and I) were lucky. Their FHA loan was approved, but they will be paying thousands more in interest over the next 30 years than they originally planned to. All because they did not check their credit before applying for a mortgage. Don’t make this mistake!