Can A Credit Report Stop Your Closing? Loan Denied!

Sensitive topic here for sure…but an important one, none the less. The scene is: you have done everything you were supposed to. You applied for a loan, provided the lender all of the necessary documents and after a month of back and forth you have received the coveted “clear to close.” Excited, you start getting ready to move. You now order the moving trucks, share with friends and family your new address, and order the appliances that are on sale. All is going well; your attorney has notified the seller that your loan has been approved and you wait with anticipation your new home. Just days before closing you receive a phone call from your lender with a simple message – your loan has been denied and we are not able to close your loan.

You think and say what everyone else in your situation does – this isn’t fair! How is this happening? What am I going to do? Who’s at fault?

Here is why it happened and what you can do to prevent this scenario from happening to you. Around the time you applied for your loan, your lender, banker or broker will have ordered a credit report on you. This credit report was used to determine your credit worthiness in respect to the mortgage you applied for. Certain aspects of the credit report are important to the lender. Perhaps most important is the credit score. In theory, the higher your score the greater the likelihood you will make your payment. This score is calculated based on a number of factors, such as if you pay your bills on time, how much credit you have and use, and how long your credit accounts have been open.

What most people do not know, is that the lender will perform a quality review of your file just before closing, done generally 3-7 days before closing. This review will include another look at the appraisal, the loan documents you provided, re-verification of your employment status and a new credit report. During the review, if any of the items are found not to meet the standards of the loan you applied for, your loan could be denied or additional information requested.

One thing that happens all too frequently during the review process is new credit information is discovered. Often times it is the new credit you applied for or used when you ordered those appliances. That interest free deal the store was offering you can cost you your loan approval. Any new debt or changes to your credit report will affect your debt ratio and credit score, often times to the negative. A reduced credit score could cause you to no longer qualify for the loan you applied for. Higher debt to income ratios could kill your approval.

Here are a couple of examples of items that can appear on your credit report and potentially jeopardize your loan:

• The parking ticket you forgot about or even never knew about that was just reported to the credit agency as unpaid.
• A medical bill for your child was turned over to a collection agency. Perhaps you thought insurance was going to cover it; but didn’t.
• You co-signed for a friend or family on a credit card and they just bought that big screen cinema package. Great fun for them, however, you now have $5000 more in credit card debt.
• Again, you co-signed for a friend or family member and, oops, they missed a payment and now your credit report shows a late payment.
• Shopping for furniture for your new home, you came across that great deal and decided you needed to “buy now”. No worries as they were offering no interest and no payment for a year.
• This one always surprised me - so many people want to buy that new car at the same time they were buying their home; and some do regardless of the warnings ahead of time.

Borrowers who’s credit score is near one of the many lender thresholds are at the greatest risk. I’ve seen minor fluctuations in credit scores cause the loan application to be denied. Here is a threefold solution to help minimize this problem:

1. Make no purchases using credit of any kind, do not apply for any credit, don’t even let anyone else order your credit report.
2. Do not pay off any collections or past due amounts unless specifically told to do so by your lender. If you are asked by the lender to pay off a debt as part of your mortgage loan approval, request from the lender for them to permit you to pay the amount at closing. Many lenders still do not realize that paying of collections, judgments and past due items that are over 6 months old can reduce your credit score. Why? Because it takes an old negative mark and turns it into a current negative mark. Credit agencies place greater weight on new or current credit information.
3. Finally, if you know you owe someone or someplace money and it is not appearing on your credit report, pay it quickly.

The mortgage industry continues to evolve and look for ways to cut mortgage losses. In my opinion, the approval process has become unfair and burdensome; many good people will suffer by paying more for their mortgage loan and others will simply not be able to buy.