The purpose of Money Talk is to improve readers' financial capability with research-based personal finance information.
Wednesday, September 18, 2019
Check Your Credit Report Before You Get a Mortgage
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 11th
hour 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:
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.
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!