It is no doubt that you realize that your credit score has a lot to do with whether or not you are able to qualify for a mortgage, including FHA loans. But, did you know that there is more than meets the eye when it comes to your credit report? The lender you apply with is not only looking at the three scores at the bottom of your tri-merged credit report or even your credit history – they are also looking at your credit inquiries because they can give quite a bit of insight into what you plan on doing with your financial future.
Past Credit Inquiries
The inquiries on your credit report show a potential lender what you have tried to apply for recently. This could be a credit card, installment loan, or even a line of credit. These inquiries are not a guarantee that you took out new debt, but they do alarm the new lender that there could be new debt that is not reporting on your credit report. If the inquiries are rather recent, such as within the last month or two, expect your new mortgage lender to question the inquiries and require proof that you did not take out any new debt. If you did take out a new loan, such as an installment loan, the new payment will need to be figured into your debt ratio to ensure that you still qualify for the FHA loan. If your debt ratio is borderline close to the limit of 43 percent on the back-end, then you might have a little difficulty qualifying for the loan.
What were the Inquiries For?
Another aspect that the new lender needs to evaluate is what the new inquiries were going to be used for – especially if the funds were used to help the borrower qualify for FHA loans. If you have a large amount of reserves to help you qualify for the loan and you have new inquiries for a line of credit, the lender can put two and two together and disqualify you for the loan. It is the lender’s job to ensure that you did not use any of the borrowed funds to help you make your down payment or pay the closing costs on your new loan.
Consider what you Apply for Early in the FHA Application Process
The best way to avoid any confusion when you decide to apply for FHA loans is to avoid applying for any other debt during the few months prior to the application as well as during the time period that your loan is being processed. Most lenders pull your credit at least twice, once at the time of application and then again right before closing. This helps them to see if there were any new inquiries on your credit report as those report right away. Even if a new debt is not reporting on your credit report right away, the inquiry is enough to get a lender to be suspicious about what you have going on in your financial future.
Don’t look at the fact that lenders need to look at your credit inquiries as a bad thing; they are just trying to protect themselves as well as you from financial ruin in the future. It is the lender’s job to ensure that you can afford the loan not only based on your past income and debt, but on what they can predict for the future. The inquiries on your credit report provide quite a bit of insight into your financial future, so it makes sense that lenders will use it. They can show you how the new debt can make your debt ratio skyrocket, which could make it difficult for you to pay your debts in the future. Holding off on any new credit cards, auto leases, and installment loans is a good idea until you are done with the process of getting a new mortgage loan.