One of the biggest factors on a mortgage application is your credit report. Lenders pay a lot of attention to your payment history, types of credit and how much overall debt you have. You should take the steps to getting your credit in the best shape possible before applying for a mortgage. However, there are some false misconceptions about how lenders view different items on your credit report. Let’s clear up 4 credit report myths about how your lender actually feels about them.
Being a Co-signer
Many people have co-signed on a loan for a family member and have never made a payment on that loan. They often forget they are obligated to the loan until they apply for credit themselves. They may find themselves in a situation where the payment for the loan they’ve cosigned on makes their debt to income ratio too high and it jeopardizes being approved for the loan they want for themselves. Even though you may have never made payments on that loan, your lender will still include it in your debt to income ratio. Their reasoning is that if the other co-signer on the loan falls into financial hardship you will be responsible to make the payments on the loan. They want to make sure that you can adequately afford all outstanding debts that you have plus the new mortgage you are applying for.
Student Loans in Deferment or Loan Forgiveness Programs
There are many misconceptions about how student loans affect your mortgage application. The most common is that applicants feel that since their loans are in deferment. This is in a loan forgiveness program that the payments will not be counted on their mortgage application. Most mortgages are 30 years long. Your lender acknowledges that your loans are in deferment at the time of applying. However, at some point during the mortgage you will be paying on your student loans again. Additionally, if you are in a loan forgiveness program your lender will still include your student loan payments into your debt to income ratio. If for some reason you lose the possibility of having your loans forgiven because you lose your job or change careers or the program ends, your mortgage provider wants to be sure you can afford all of your payments.
Another big misconception is that your mortgage application can be denied because you have too much credit available to you. Mortgage underwriters take into account the available revolving credit, but they are more concerned about how much credit you are using, what your availability ratio is and what your overall debt to income ratio is. They cannot legally deny your application based off of available credit, especially since you may never use it all. Do not go and close out a bunch of credit cards before applying for a mortgage because you believe this myth. That can end up negatively impacting your credit score and cost you thousands in interest over the life of the loan.
There is a lot of bad information circulating about medical collections and how they affect a mortgage application. Most people believe that any collections will result in a denied application. Generally it does in many cases, lenders do make exceptions. Financial service industry views medical collections differently. Last year FICO made changes to how collections affect your credit score making the negative impact much less. Lenders understand that medical emergencies can arise and outstanding medical bills very quickly go into collection. They do not see this as a direct correlation with financial irresponsibility. Your mortgage provider will want to see that you are at least working to pay off the collections. The collections that exist through various payment plans. Also that you can afford all of the payments, but they won’t deny you solely because you have medical collections.