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04 Aug 2011

3 Red Flags That Hurt Home Loan Approvals

Home Loans No Comments

Tristan Powys (Credit Manager) @ Lucid Living

If your credit report is riddled with numerous late payments or major black marks – like a judgment or a recent adverse listing – it probably comes as no surprise that you’ll have a tougher time getting a home loan than someone with a “clean” credit report.
But what about those of you who have decent credit ratings, or maybe even good credit? An above average credit score alone frequently isn’t enough to get a home loan application approved, especially if other items on your home loan application are sending up warning signs to a lender.

Here are three red flags – on your credit report – that could cause lenders to think twice about extending you a home loan.

1. Too many credit card accounts

What’s the “ideal” number of credit cards you should carry? Frankly, no one knows. It all depends on what a lender is looking for. It’s one thing to have a good mix of credit and an adequate number of credit cards from the standpoint of the credit scoring system.

But it’s another thing entirely to fit a lender’s profile of an ideal customer. Banks often use their own customized, credit-scoring software. Additionally, they may judge your request for a home loan based on your overall “application score.”

Whereas a credit score focuses on elements like your payment history and outstanding debt balances, your application score will assess everything you state on your home loan application, from how long you’ve lived at your current address to your income to the length of time you’ve been at your present job. None of these are factors included in your credit score.

Of course, if you’re trying to get approved for a credit card application and you’ve already got a wallet full of plastic, don’t be surprised if you get denied on the basis that you already have “sufficient” credit. Sufficient to some banks means you have enough cards. Sufficient to other banks means you have enough credit in terms of your credit limits.

Either way, since lender guidelines vary based on each institution’s risk appetite, it’s not uncommon for a person deemed to have “sufficient” or “too much credit” by one firm to be judged as a perfectly safe lending risk by another firm.

2. Having a 100-word “Consumer Statement”

If you had a financial problem in the past – say you were retrenched or suffered loss of income due to health related issue – you certainly wouldn’t be the first person to have fallen behind on your payments during such an ordeal.

If you later tried to clean up your credit report, you may have been advised to add a100-word “Consumer Statement” to your credit report. Individuals use such statements to refute late payments, offer their side of disputed credit accounts or to generally explain to potential creditors, employers and others why something negative is present in the credit report.

Even though the credit bureaus give you the right to add a Consumer Statement to your credit report, doing so is typically a mistake and can be a turnoff to lenders. Will a Consumer Statement cause a lender to kick your home loan application into the rejection heap? Not likely.

Still, no matter what carefully crafted explanation you come up with, you run the risk of looking like a bad credit risk to a lender. And if you do have a borderline application and a bank has to review your home loan request manually, you don’t want to give that person any reason not to give you the benefit of the doubt.

3. Evidence of recent credit shopping

Whenever you apply for a credit, some institution will pull your credit report to check out how you’ve handled your financial affairs. Those reviews of your credit report result in “hard inquiries,” which stay on your credit report for two years.
Even if you’re up-to-date with all your payments, if you’ve recently been shopping around for credit and allowing numerous banks or other entities to peek at your credit report, that could hurt your chances of winning a “Yes” from the bank of your choice.
First of all, all those inquiries could lower your credit score, jeopardizing your home loan application. Additionally, some lenders may ask you to explain your recent behavior. Just because a recent inquiry shows up on your credit report, another lender has no immediate way of knowing:
a) whether or not you were approved for credit; and
b) whether or nor you accepted that credit or loan offer.
So a prudent lender that sees a relatively recent inquiry will want to know whether or not you took on new credit obligations that may not yet be showing up in your credit report. Before approving a home loan, a lender may even ask you to attest, in writing, that you’ve not racked up any other debts than what now appears on your credit report.
All of these red flags serve as reminders to manage your credit and debt wisely. This way, when you’re in the market for a home loan, you’ll get the best rates and terms available.
You also won’t have to jump through all sorts of hoops explaining what could be viewed – at least from a lender’s perspective – as red flags in your credit report.
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