2/09/2009

Loan Pre-Approval and Credit Scores

So often I hear from prospective buyers that they are afraid the loan pre-approval process will lead to a drastic lowering of their FICO (credit) score because, of course, their credit record must be viewed in the process.
So here it is from the horse's mouth: "Shopping around for an auto loan or mortgage shouldn’t hurt, if you keep your search to six weeks or less", per Craig Watts of Fair Isaac Corporation, the company which developed the FICO credit scoring system used throughout the world of credit.

Other factors that make up your score are length of credit history, how many accounts you've recently opened, balance due on your credit lines and the total amount available to you (keep your balance under 50%), and your payment history counts for 35% of your score. Many times people do not realize that having a 30-day late pay recorded on your credit history can be almost disastrous for some loans, or that the big car purchase or the last minute furniture purchase before you closed escrow may send your credit score over the cliff at the last minute before you close escrow. Yes, the lenders check your credit report once again just before the schedule closing to make sure you're still in good shape.

There are more impacts to your credit score, for instance in a short sale or foreclosure, but this article gives a good basic outline so you know what to expect.

Remember, getting pre-approved for a loan should not be impacting your score negatively, and should not be a reason as to why you can't go forward with the process. Also, if your score does fall for some reason, it will come back up within 60-90 days at a certain rate once you start eliminating the problem. It's important to talk with the loan officer first to find out what is needed or must be changed for qualification for a loan--another mistake people make is going ahead and taking certain actions, such as cancelling a credit card after they paid it off, which actually may hurt rather than help them. So don't be afraid to ask a professional first about what the best course of action might be in terms of qualifying for the loan.

4 comments:

Shania Scott said...

Hi, this is a very useful piece of information. However, can you please shed some light on the number of days that constitute the Credit card history for the verification process? As per your blog, the credit history amounts for 35%, but how often as you excused of a couple of days default?

Shania Scott said...

Hi, this is a very useful piece of information. However, can you please shed some light on the number of days that constitute the Credit card history for the verification process? As per your blog, the credit history amounts for 35%, but how often as you excused of a couple of days default?

Julia Huntsman said...

Shania, I don't know the number of days involved, but it's also kind of relative to all your credit lines. It's a good question for a lender who is used to seeing these items in a variety of siutations with borrowers.

Gena said...

Julia,
These are questions all home buyers have and you did a great job at answering them.

It can't be stressed enough for eager home buyers to put off buying that new appliance or furniture on credit before they close on a house. I've heard horror stories where at the last minute the loan was denied due to homebuyers over anxious spending.

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