Applying for New Credit After a Home Loan Application?
When you realize how the mortgage application review process works, it’s far easier to appreciate why it’s a very bad idea to open or try to open new lines of credit between the time you apply for the mortgage and closing day.
Your participating FHA lender will not pull your credit reports just once during the home loan process. It is standard procedure in the mortgage industry to check more than once. What happens if your lender sees new information that changes your ability to afford your mortgage after the loan closes?
Your loan officer may be required to re-qualify you to approve the loan and there is no guarantee that the new credit information won’t complicate things.
And that’s just the presence of new credit in your report. What about how a new line of credit potentially affects your debt-to-income ratio?
Checking your credit and employment history is part of a larger need to know that any potential borrower can afford both current financial obligations as well as the new proposed mortgage loan payment. The big question is fairly simple. How much of your monthly income is taken up by your debt?
And what about potential future debt? That is a complicated question when a new line of credit shows up in your credit report during the loan approval process. And it’s not just new credit lines you succeed in the opening. The act of applying for the new credit is visible to the lender just by checking the number of credit inquiries in your credit report and the dates of those inquiries.
HUD 4000.1, the FHA Lender’s Handbook, instructs your loan officer in this area as follows:
"The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios. The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrowers required funds to close on the Property being purchased."
It is important to understand in this context what the FHA considers to be a material inquiry. FHA loan rules say these are the types that “may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries."
Bottom line? Don’t apply for new credit while you are working on your home loan. Avoiding these new applications will help keep your loan process as simple as possible without the complication of your lender having to re-verify your financials where applicable.
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