Excluding Debt from your Loan Application

There are certain debts that show up on your credit that can be excluded from your Debt to Income ratio (DTI) when applying for a mortgage. Some debts, however, cannot be excluded and may affect your ability to qualify for a loan.

The most common debts borrowers try to omit from their DTI are:

• Student loans with deferred payments
• Car loans paid by someone else
• Installment loans with less than 10 payments left
• Business loans paid by a self-employed business.

In order for any of these debts to even be considered for omission, certain stipulations apply.

Student Loans

FHA loans do not allow student loans to be excluded for deferred student loans. All student loans, including deferred student loans must have a monthly payment calculated in the debt to income ratio.

Conventional guidelines do not permit the deferment of student loans. If you are applying for a Conventional mortgage, you will have to count the estimated payment into your DTI regardless of how long the loan will be deferred.

Car Loans

Car loans must have 12 months cancelled checks to show that these debts were paid by someone else. If the car loan is less than 12 months old, it is not possible to omit this payment from the DTI.

Further, the loan applicant must be a co-signer on the car loan, and not the primary borrower. This means that the person paying for the car loan must also be on the car note as the primary borrower.
A car lease, however, can never be omitted from the DTI. When you turn a leased car into the car dealership, it is expected that you will lease or buy another car, incurring a debt that would be similar to your current car lease payment.
Conventional and Government guidelines allow for the exclusion of car loans paid by someone else if the above documentation is provided.

Installment Loans

Most lenders still allow the omission of installment loans with less than 10 payments from the DTI. There are a few lenders who will not allow this now, so it is best not to count on it as a guarantee.

Conventional and Government guidelines both allow for the exclusion of these debts, but some lenders could have a credit overlay that is impossible to overcome.

Business Loans

Business loans are tricky to exclude, and are at the underwriter’s discretion.

When attempting to omit business loans, remember that it is always easier to prove that installment loans are paid by a business because these loan payments have a fixed amount.
Revolving debts have revolving payments, so it is extremely difficult to prove that a business has been paying for this account for 12 months.
Documentation that is necessary to prove that a loan is paid by a business includes, but is not limited to:

• 12 months cancelled checks from a business account
• Business account bank statements sourcing the funds may be required
• If the account reports on your credit report as being a business account, this could also help sway the underwriter into omitting accounts paid by your business. Or the original note showing that the account is a business debt could help the cause as well.

FHA FICO Score Minimums

It's true that the FHA does list a minimum FICO score of 500, but very few lenders offer this financing option.  Many lenders have "Overlay's", or "Additional Required Guidelines" to qualify for a home mortgage.  Why is this? The lower the fico score, the higher the likelihood of the borrower defaulting. The risk of a borrower defaulting can count negatively against the lender and the loan officer.

HUD tracks borrowers defaults and tracks which lenders and loan officers were involved in the transaction and wrote the loans, it si called "Lenders Compare Ratio". The FHA's Lender Compare Ratio is calculated for all lenders. This ratio is geographically based, comparing the rate of early defaults and claims for single family loans in a geographic area to other mortgagees in the same area.

Both the mortgage lender and the loan officer have Compare Ratios that follow them throughout their careers.  The more defaults that their borrowers have, HUD can essentially not allow that entity or person to issue FHA loans in the future. So the risk factor is not just there for FHA but also for the lending entity and the loan officer.

Many lenders have a minimum FICO score requirement of 620 to a 640. This is to mitigate their risk with their Compare Ratio. To only require a 3.5% down payment, a minimum score of 580 is required. 

The minimum required FICO Score to get an FHA loan is 500.  For borrowers who have FICO scores below 580, 10% down payment of 10% equity for a refinance is required with FICO scores below 580 (500 to 579).

However, these score requirements are the FHA minimums, not the lender’s standards. Many lenders FICO scores vary from the FHA loan rules and are usually more strict than the FHA guidelines FICO score requirements.

There are a few items a person can do to improve their credit score or even correct credit reports (without paying third parties to do so on the borrower’s behalf). Paying off or paying down debt, paying accounts on time are the best ways to improve your scores.

Credit scores are a critical part of the loan approval process. Striving to get a high credit score and a repayment history with 12 months of not missing a payment is vital to increasing your FICO scores.

To be eligible for an FHA loan, you have a maximum of one (1) non-mortgage late in the past 12 months. Though this is not recommended, it is possible to have one late payment in the past 12 months.

Whether your FICO score is in the 700's, 800's or if your FICO score is on the lower end of the minimum standard of FHA, we can help you get the financing you need to either purchase a home or refinance your current FHA loan.

Do's and Don'ts While Your Loan is Being Underwritten

Any change in your employment, income, or credit profile, no matter how small or seemingly insignificant, can adversely affect your loan approval. It is critical that you follow this list of Do's and Don'ts while your loan is being reviewed by an underwriter: 

• Do make the minimum monthly payments on your consumer debt until your new loan closes and funds. Any deviation from this may negatively affect your mortgage application.
• Do make sure that your mortgage payments are no more than 15-days late until your new loan closes and funds. As your application gets closer to settlement, please inform your Meridian Home Mortgage contact if you are at risk of paying your mortgage payment more than 15 days late.
  
  **Never pay your mortgage payment 30 or more days beyond the initial due date**
• Do answer or return calls from the Title Company working on your application. On occasion there are outdated or unreleased liens which can cloud the ownership of your property, or similar situations which require the Title Company to contact you and request information to clear your title in preparation of your potential closing.
• Do fax or email us any items that we request from you immediately. These items are required by the underwriter. All of the documents in your file have an expiration date. Every day that passes between the underwriter’s request and the time you provide them means additional items have the potential to expire. We will always be battling the underwriter to crunch time frames on your behalf and to immediately establish the first available closing date.
• Do hold onto all of the pay stubs, bank statements, retirement account statements, pension statements and social security statements that you receive electronically and through the mail until your new loan closes and funds. You may be required to provide them.
• Do not resign from your current job or retire during the loan process. If you have an opportunity to leave your current job for a better opportunity please reach-out to us prior to making a decision to determine how it might affect your loan.
• Do not open any new credit accounts or apply for new credit accounts prior to your new mortgage loan closing. Any new account or credit inquiry can easily be identified by the underwriter and may put your application at risk. We understand there are life situations that arise, such as the need to apply for student loans to finance a child’s upcoming college semester. We ask that you discuss these types of scenarios with us prior to taking action.
• Do not make any balance transfers on your existing credit card balances. Any new account or balance transfer may slow your mortgage application process.
• Do not pay off any existing consumer credit accounts in full (e.g. credit cards, auto loans, etc.) unless it is through the natural progression of making your minimum monthly payment.

Following these instructions will help to prevent any delays in your loan closing. Please call us at anytime if you have any questions or if you would like to discuss any specific scenario.

FHA Loans and Student Loan Deferments

“If applying for FHA and student loans are in deferment until after the closing date, does it have to show a year after the first payment is due? For example, if the payment is due July 1, 2012 does it have to show July 15, 2012 or later?”
 
This question is addressed in the FHA loan rules spelled out in HUD 4155.1, Chapter 4 Section C. It’s covered in the section titled, “Borrower Liabilities: Projected Obligations and Obligations Not Considered Debt” and includes a list of things the FHA does not consider debt for the purposes of calculating a borrower’s debt-to-income ratio for an FHA home loan.

Student loans are specifically addressed in this section, which states, “Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing must be included by the lender as anticipated monthly obligations during the underwriting analysis.”

But the rules also add, “Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12-month timeframe.”

If a borrower has a student loan which has been deferred, it may or may not qualify to be excluded from the debt to income ratio calculation based on when it becomes due according to FHA policy. Will the lender’s individual policy vary from this? Could a lender require the debt to be included anyway based on the due date? It’s possible–but your experiences may vary depending on which lender you are working with.

FHA loan rules also have a list of other financial obligations and circumstances which do not have to be included in the debt to income ratio. The FHA lists them in the rule book as follows:
“Obligations not considered debt, and therefore not subtracted from gross income, include

FHA Loans and Verifiable Income: Alimony, Child Support, and Maintenance Payments

Borrowers applying for an FHA home loan have good reason to consider listing alimony, child support, and maintenance payment income on their loan applications.

Not all wish to have this type of income included in their application data, but when accompanied by proper documentation and when verified by the lender, these types of “non-employment income” can be used to help calculate the borrower’s debt-to-income ratio for FHA loan approval.

But what does the FHA require in order to verify and approve these income sources for the FHA loan?

According to the FHA official site, “Alimony, child support, or maintenance income may be considered effective, if
–payments are likely to be received consistently for the first three years of the mortgage
–the borrower provides the required documentation”

What does that documentation include? FHA rules say the borrower must provide a court order, divorce decree, separation agreement, and/or a statement of voluntary payments or other paperwork that shows in writing what the terms of the agreement are and how much per payment. Your lender may also require evidence that payments have been received over the previous year, which can include receipts, deposit slips, tax statements, or court records.

Can My Spouse Apply Alone For An FHA Loan?

If a married couple has an extremely high debt to income ratio, can only one spouse be on the mortgage loan and leave the other spouse off? This is a situation where some spouses may have less credit but double my income and very low debt to income ratio. Is it possible that the spouse can qualify using only their income and credit to qualify for an FHA loan?”


There are several factors which may apply in a situation like this. Borrowers should know that when applying for FHA home loans, credit scores, employment history, verifiable income and other factors will figure into loan approval.

That said, assuming all the above requirements are met, the basic question is whether a borrower can apply for an FHA loan independently of the spouse. This depends on community property laws which may apply in the state where the loan is issued.

Community property laws concern the disposition of debts and property within the context of a marriage. Community property states generally may require both spouses to be obligated together on a real estate loan.

For this reason, borrowers should discuss community property issues with the lender and/or a lawyer where appropriate to make sure all rights and responsibilities are understood. In many cases a simple discussion of community property laws with the lender may suffice–if the borrower simply needs information. If the borrower needs legal advice, consulting a lawyer is the best course of action.
Unfortunately there are no quick answers to this question–not all states have community property laws, and those laws may differ from state to state.

Debt To Income Ratio Rules:

In the circumstances that one has a large amount of debt and the payments have been paid by another person, IE., A parent, ex-spouse, another person, can that debt not be counted on my debt ratios?

There are two basic factors at work when the lender is reviewing a borrower’s debt-to-income ratio. One is the borrower’s current debt load compared to the amount of income coming in. The other is how the new FHA loan payment would affect that debt load.

If a debt is in the borrower’s name, those debts would have to be considered, regardless of the extenuating circumstances. However, if there is a payment being made on the borrower’s behalf may or may not be considered as a compensating factor.

The basic answer to this question is that it may depend on the lender. A strict interpretation of FHA loan rules might lead one to believe that the borrower’s debts in this case are simply included in the ratio but not the payments from another person that has been making the payments for a minimum of 12 months and a paper trail can be provided showing payments coming out of that persons bank account then that debt can not be counted against the person getting the mortgage loan.

But if those payments are “likely to continue” in the eyes of the lender, there might be some flexibility possible. But saying that should not be construed as a guarantee or a promise that such arrangements will be approved by the lender or the FHA.

Matters such as these would be handled on a case-by-case basis. Borrowers should be prepared to fully document the situation, get written guarantees or other certifications that might convince a lender to favorably view the arrangement. But at the end of the day, it may be the lender’s call or the decision might be made based on the requirements of the financial institution or even the applicability of state law.

Does Alimony/Child Support Count As Income?

We’ve been discussing topics this week related to FHA loan rules for income and employment. The participating FHA lender is responsible for verifying an FHA loan applicant’s employment and income to make sure it is a stable and reliable source of income.

Not all forms of income can be used on the FHA loan application. Sporadic income that is not consistent income such as sales from online websites (ie. Ebay, Amazon, Paypal), for example, may not qualify, and certain types of commissions may not qualify depending on their frequency. GI Bill housing stipends cannot be used because they are not “likely to continue” past a certain number of months.

Then there is the common question about child support and/or alimony payments. Can this form of income, if declared on the FHA loan application, be used to qualify for the mortgage?
Chapter Four of HUD 4155.1 provides the answers.

“Alimony, child support, or maintenance income may be considered effective, if
• payments are likely to be received consistently for the first three years of the mortgage
• the borrower provides the required documentation, which includes a copy of the
− final divorce decree
− legal separation agreement,
− court order, or
− voluntary payment agreement, and
• the borrower can provide acceptable evidence that payments have been received during the last 12 months, such as
− cancelled checks
− deposit slips
− tax returns, or
− court records.”

Are FHA loan applicants with less than 12 months of child support or alimony income left out in the cold? Not if certain conditions are met, according to Chapter Four:

“Periods less than 12 months may be acceptable, provided the lender can adequately document the payer’s ability and willingness to make timely payments.”

Previous Mortgage Housing Obligations and Your Credit

When you fill out your FHA loan application paperwork online or in person, it’s obvious that part of the qualification process involves having your credit scores examined and your employment verified.
What may not be so obvious is that the lender is also looking for patterns of reliability in areas such as the timely payment of your monthly obligations. Some FHA loan applicants might mistakenly assume that while late or missed mortgage payments might be a factor that missed rent payments aren’t held in the same esteem.

Is this true? Not according to HUD 4155.1 Chapter Four, Section C, which has instructions for the lender on checking credit report data. A strict interpretation of Chapter Four reveals that there is no difference between how the FHA or the lender should view late or missed mortgage payments OR the equivalent in meeting monthly rental obligations.

“The borrower’s housing obligation payment history holds significant importance when evaluating credit. The lender must determine the borrower’s housing obligation payment history through the

• credit report
• verification of rent received directly from the landlord (for landlords with no identity-of-interest with the borrower)
• verification of mortgage received directly from the mortgage servicer, or
• review of canceled checks that cover the most recent 12-month period.”

The FHA takes this issue seriously enough to include the following note to the lender; “The lender must verify and document the previous 12 months’ housing history even if the borrower states he/she was living rent-free.”

A lender may not reject an FHA loan application on the basis of a one-time missed payment, or a period of financial difficulty that the borrower can show is now resolved. But much is left to the lender’s discretion. It’s good to know this before you apply for an FHA mortgage loan. Knowing what the lender is looking for in your credit history is a very good thing to understand fully as you get ready to apply.

Student Loans and Debt-To-Income Ratios

When you apply for an FHA loan, your lender must calculate the amount of income you have versus the amount of debt you currently pay on and factor in the amount of your projected mortgage. The amount of debt is compared to your income to determine whether or not you can afford the loan based on FHA guidelines.

In general, borrowers should have less that 40% of their income taken up by recurring financial obligations. FHA rules explain exactly how much debt to income you can have and still qualify for an FHA mortgage. These ratios can vary depending on the borrowers status as a self-employed person or other factors.

The overall debt picture is important when the lender is trying to figure out if a borrower is a good credit risk, but certain types of debt don’t factor in right away–for example, a student loan that is not yet due but may become due within a year or so of the home loan closing. Can this student loan debt be used in the debt-to-income ratio calculation?

FHA loan rules in HUD 4155.1 Chapter Four, Section C addresses this issue, stating:
“Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing must be included by the lender as anticipated monthly obligations during the underwriting analysis.”

However, FHA loan rules also add, “Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12-month time frame.” Borrowers who have a student loan deferred in such a manner should bring paperwork to the lender to show this will happen–the lender will need to document this accordingly.

It may be best to request deferment paperwork before you start the loan application process for an FHA mortgage loan. This will speed the process up by having the paperwork ready to turn in with the other documents with your mortgage application. If you’ve already applied for an FHA loan and you don't have the deferment paperwork, it is best to request the deferment paperwork on your student loans and request that they expedite the process in getting the deferment letter to you.

FHA Loan FICO Score Requirements

FHA loan rules do specify a minimum FICO score for borrowers who want to qualify for the lowest down payment of 3.5%. FHA (HUD) has set a minimum score of 500. Though it it is set at 500, there are very few lenders in the country that will go down to a 500 Fico score. Most lenders have "Overlays". Some will have a minimum score of 580. Others are at 600 & some are at 620.

FHA loan rules do not prevent the lender from have more strict standards (overlays) as long as they are applied in compliance with federal law, Fair Housing Act regulations.

Individual borrower circumstances can and often do play a role in the kinds of terms a borrower is offered. FICO scores are only part of the picture.

Historically, the lower the score a borrower has, the more challenges there are with the file.
The best way to increase ones credit score is to pay your bills (accounts) on time for 12 months. By striving to pay down and pay off your debts.  Anytime you have a missed payment (30 day late), a drop is approximately 30 to 50 points. Collection accounts will drop a score 30 to 50 points.

How you can get an FHA loan

Do you have too much debt to qualify for a conventional mortgage? Having a less than perfect credit score or not much cash for a down payment or a shorter time period since a foreclosure or bankruptcy? You should consider buying a home with an FHA mortgage loan.

The Federal Housing Administration, a division of the Department of Housing and Urban Development, was created 80 years ago to help low and moderate-income families obtain financing for home ownership when there was not an option for the low income population.

The FHA doesn’t actually make home loans. It guarantees that lenders will be repaid if you default on the loan.

That guarantee allows banks and mortgage companies to work with borrowers who might not be able to qualify for conventional home loans and at surprisingly competitive interest rates.

The majority of mortgage lenders are the one that make FHA mortgage loan. One out of every five new home loans is now backed by the FHA according to Ellie Mae, a California-based mortgage technology firm.

FHA has maximum loan limits (loan limits or loan amounts) on how much you can borrow with an FHA loan. (See the FHA Loan Limit based for the county you want to view). Most parts of the country the maximum loan amount is up to $271,050 for single-family homes. Some areas are more. You need to see the FHA county loan limit guide for the county you are in. In high cost areas of the country, as much as $625,550 (areas such as New York and San Francisco).

If the loan amount you need fits in this range then you need to find out more about getting an FHA loan.

They have smaller and more lenient down payment requirements.

FHA mortgages require a down payment of 3.5%. This is $3,500 for every $100,000 you borrow. The average down payment on an FHA home loan is about 5%, according to Ellie Mae statistical reports.

Compared to conventional loans, this is well under the the average non-FHA mortgage loan.

The down payment can come from a gift from a relative, an employer or a community down payment organization that provides financial assistance.

Many conventional mortgages require the down payment to come from a borrower’s savings or other assets, such as proceeds from the sale of another home.

You can qualify with below-average credit scores.

Before the financial crisis, FHA loans were for borrowers with bad credit.

And we mean bad credit. Applicants with FICO credit scores below 640 scooped up more than half of all FHA-backed mortgages, while those with credit scores below 580 received about a quarter of them.

Now borrowers with such bad credit obtain fewer than one out of every 10 FHA loans.

Indeed, the average FICO score for rejected FHA applicants is 665, a score that would have landed in the top half of FHA borrowers just a few years ago.

Most of the money currently goes to home buyers who have below-average, but not terrible, credit. The average credit score for successful applicants is running at 685 so far this year.

But let's be clear. That's still way below the average score of 755 for non-FHA loans.

So what’s the secret to qualifying if you have a credit score in the low 700s or high 600s?

Successful applicants usually have a two-year history of steady employment and paying their bills on time.

You can get an FHA loan if you’re self-employed. Just be ready to document your income with tax returns and financial statements from your business.

The same big financial problems that derailed FHA applications in the past continue to do so. If you:

• Declared Chapter 7 bankruptcy, you usually must wait two years from the date of discharge before qualifying.

• Lost a home through foreclosure, you must wait three years. However, if you can prove that the foreclosure was caused by involuntary job loss or income reduction, and your payment history has been good since then, the waiting period can be as little as one year.

• Are delinquent on a federal debt, such as a student loan or income taxes, you can’t get an FHA loan.

• If you have a credit score lower than 500, you won’t qualify under FHA guidelines. Most lenders have a higher minimum of 600.

You’re allowed to carry more debt.

To obtain a non-FHA loan, borrowers must be spending no more than 36% to 45% of their pretax income on all debts, including mortgage payments, student loans, credit card bills and auto loans. The limit depends on the borrower’s down payment and credit score.

With an FHA mortgage, you can stretch that ratio to 47% — or even a little higher in some instances.

We can get loans approved over a 50% debt to income ratio. It doesn't happen on every file, but it can if they have excellent credit, good job stability, skin in the game and money in the bank after closing. 

If your credit score is below 580, however, debt-to-income ratio can’t exceed 43%. Just because you can be approved with a higher debt ratio doesn’t mean you will be. The typical rejected applicant has a debt-to-income ratio of 50% or higher.

Contact Ben Gerritsen for financing at: 801-747-9176 www.wedohomeloansforyou.com

Increasing a Credit Score

Credit scores have a dramatic effect on a borrowers ability to get the best terms for many types of financing including a home mortgage, a car loan, credit cards, cell phone carriers, utility companies run credit checks, and even some employers rely on credit to screen employees.  To be in in the mortgage industry and the insurance industry, you have to have your credit checked often by regulators. This is how important credit is to the world we live in today

If your credit score does not meet minimum standards you may not even have the ability to get a home mortgage at all.

There are a number of factors that the credit bureaus use to calculate your credit score. One of the most important factors they use is your past payment history which generally accounts for 35% of your credit score. In the mortgage article how to improve a credit score, all the various ways you can achieve and maintain a great credit score are discussed. If you pay attention to these credit scoring factors you will be well on your way to achieving an exceptional credit score.

When it comes to your home there are ways to improve a credit score with specific home finance tips.

Pay Your Bills On Time.

It goes without saying that paying your bills on time is a must if you want to have excellent credit. Above all else you want to make absolutely certain you pay your home mortgage when it is due. As mentioned above, past credit history is a critical factor on how you be viewed by a lender when applying for financing.

There is nothing that will hit your credit harder than a missed payment. Credit scoring agencies will look at a missed mortgage payment in a far more negative light than a missed car or credit card payment. If at all possible you should always consider making your mortgage payment before other bill that are due.

Check Your Credit Report For Errors often

While working in the mortgage industry for many years, I have had the opportunity to see 1st hand that it is easy for credit bureaus to make mistakes on a persons credit report. A credit report error can cost a borrower a lot of money? Any mistake on your report will lower your credit score in negative manner. This makes it vital that you periodically check your credit report for errors but certainly before you try to refinance a mortgage.

If you find an error in your credit report you should make certain that you get it corrected right away! Here are the necessary steps you need to take in order to fix credit report errors. You will want to make certain the errors are corrected before applying for financing.

Postpone Financing Until Your Credit Is In Order

Depending on whether you have discovered a credit report error or had a legitimate blemish on your record in the past could be a reason for postponing a refinance. Removing a credit report error can take a little bit of time but could be worth it in the long run if you factor the difference in rate you will pay without the correction. Unless mortgage rates are climbing dramatically and locking a mortgage rate makes more fiscal sense, you will want to get your financial house in order 1st.

Sometimes there can be unpaid bills that took place a long time ago that come back to haunt you especially if they were turned over to a collection agency. Something as small as a $50 unpaid phone bill could come back to bite you in the form of a higher interest rate on your loan. Just a 1/4 point difference in rate could translate into thousands of dollars over the life of the loan. The good news is that as time goes by the blemish becomes less important in scoring factors.

Paying Off 2nd Mortgages and Equity Lines of Credit

On the surface it may seem like paying off a 2nd mortgage or home equity line of credit (HELOC) is a good idea but it may not be, at least in terms of a credit score going forward. Your credit utilization or what you owe your creditors makes up 30% of the scoring factor that credit companies use to determine your score.

The closing of existing revolving accounts will typically adversely affect the ratio and therefore have a negative impact on your FICO score. You may want to consider lowering the balance but not paying off the loan in one shot.

Pay Your Property Taxes, Income Taxes and Utility Bills On Time

If you find that you are strapped for cash there are certain bills that should always be paid 1st such as a mortgage, car loan and credit card bills. It makes sense to pay these bills 1st because they will have the greatest impact on your credit score. This however, does not make paying your property tax and utility bills on time unimportant.

The good news is that it will usually take a serious delinquency before missed payments are reported and negatively impact your credit score. Most of the time late payments on your property tax bill  or on income taxes won’t effect you for until you are seriously past due, but once they go on your credit, they last for 10 years and have a very bad negative impact on your credit report.  So you cannot neglect these items and you must be proactive to take care of them.

Always keep in mind how you manage your home finances affects your ability to either purchase a home or to refinance and get the best mortgage rates by having your credit in order.

You can contact Ben Gerritsen at: 801-814-2364
https://wedohomeloansforyou.com

Before You get a Mortgage: Ten Credit Do’s and Don’ts

How can a fully approved loan get denied for funding after the borrower has signed loan docs?
Simple, the underwriter pulls an updated credit report to verify that there hasn’t been any new activity since original approval was issued, and the new findings kill the loan.

This generally won’t happen in a 30 day time-frame, but borrowers should anticipate a new credit report being pulled if the time from an original credit report to funding is more than 60 days.

Purchase transactions involving short sales or foreclosures tend to drag on for several months, so this approval / denial scenario is common.

It’s An Ugly Cycle:

First-Time Home Buyer receives an approval

Thinks everything is OK

Makes a credit impacting decision (new car, furniture, run up credit card balance)

Funder pulls new credit report and denies the loan

In the hopes of stemming the senseless slaughter of perfectly acceptable approvals, we’ve developed a “Ten credit do’s and don’ts” list to help ensure a smoother loan process.

These tips don’t encompass everything a borrower can do prior to and after the Pre-Approval process, however they’re a good representation of the things most likely to help and hurt an approval.

Ten Credit Do’s and Dont's:

DO continue making your mortgage or rent payments:

Remember, you’re trying to buy or refinance your home – one of the first things a lender looks for is responsible payment patterns on your current housing situation.

Even if you plan on closing in the middle of the month, or if you’ve already given notice, continue paying that rent until you’ve signed your final loan documents.

It’s always better to be safe than sorry.

DO stay current on all accounts:

Much like the first item, the same goes for your other types of accounts (student loans, credit cards, etc).

Nothing can derail a loan approval faster than a late payment coming in the middle of the loan process.

DON’T make a major purchase (car, boat, big-screen TV, etc…):

This one gets borrowers in trouble more than any other item.

A simple tip: wait until the loan is closed before buying that new car, boat, or TV.

DON’T buy any furniture:

This is similar to the previous, but deserves it’s own category as it gets many borrowers in trouble (especially First-Time Home Buyers).

Remember, you’ll have plenty of time to decorate your new home (or spend on your line of credit) AFTER the loan closes.

DON’T open a new credit card:

Opening a new credit card dings your credit by adding an additional inquiry to your score, and it may change the mix of credit types within your report (i.e. credit cards, student loans, etc).

Both of these can have a negative impact on your score, and could result in a denial if things are already tight.

DON’T close any credit card accounts!!  DO NOT DO THIS!:

The reverse of the previous item is also true. Closing accounts can have a negative impact on your score (for one – it decreases your capacity which accounts for 30% of your score).

DON’T open a new cell phone or satelite or dish tv or similar type of account:

Cell phone companies pull your credit when you open a new account. If you’re on the border credit-wise, that inquiry could drop your score enough to impact your rate or cause a denial.

DON’T consolidate your debt onto 1 or 2 cards:

We’ve already established that additional credit inquiries will hurt your score, but consolidating your credit will also diminish your capacity (the amount of credit you have available), resulting in another hit to your credit.

Collections:  Sometimes a lender will require you to pay of a collection prior to closing your loan; other times they will not.

The best rule of thumb is to only pay off collections if absolutely necessary to ensure a loan approval. Otherwise, needlessly paying off collections could have a negative impact on your score.

Consult your loan professional prior to paying off any accounts.

DON’T take out a new loan:

This goes for car loans, student loans, additional credit cards, lines of credit, and any other type of loan.

Taking out a new loan can have a negative impact on your credit, but also looks bad to underwriters and investors alike.
…

Follow these Do’s and Don’ts for a smoother mortgage approval and funding process.

Just remember the simple tip: wait until AFTER the loan closes for any major purchases, loans, consolidations, and new accounts.