A few weeks ago, I came across an article on The Boston Herald ’s website discussing credit updates that lenders perform prior to a buyer’s closing. In the mortgage industry, we call this a Loan Review Report (LRR).
The LRR is an update to the borrower’s credit report, which shows whether a borrower has applied for new credit or increased balances (and payments) on existing debts. This check typically occurs three to five days prior to a closing.
Though the article is a bit over-dramatic at times (like when it compares a lender pulling an LRR to NSA’s phone surveillance) its overall message is spot on: Potential home buyers should not apply for or obtain new credit at any time during the home buying process! That’s because increased debt can push a loan from being approved to declined, even after a clean mortgage commitment is issued.
When reviewing a loan application, mortgage lenders carefully review a potential borrower’s debt-to-income ratio, which is the percentage of monthly income that goes toward paying their mortgage, bills and other expenses, like car and student loans. While maximum debt-to-income ratios depend on a borrower’s income and the overall strength of their application, lenders generally like to see that no more than one-third of a borrower’s income goes toward monthly debt and expenses.
While an LRR can potentially increase a buyer’s debt ratio, so can the rising mortgage rates we’ve seen in recent weeks. Together, these two factors can create a perfect storm of stress and anxiety in the days before a closing. As a result, not incurring new debt, which has always been important, is now more vital than ever.
Unfortunately, borrowers often don’t know that adding new debt after an initial loan approval can negatively impact their final eligibility to acquire a new loan. Many people think that once the P&S is signed, they’re free to make new purchases like buying furniture or a new car, and that’s where they can get into trouble.
At radius, we make a concerted effort to remind borrowers about the risk of incurring new debt throughout the loan application process. It’s a message that can’t be underscored enough!
If acquiring new credit can’t be avoided, borrowers should talk with their mortgage lender first to avoid any potential pitfalls.
Applying for a home loan is generally stressful for everyone, even for experienced borrowers with low debt-to-income ratios and stellar credit ratings. That’s why it makes sense to do everything in your power to minimize pitfalls.
The bottom line is this: After home buyers apply for a home loan, they should keep their wallets closed! Don’t apply for or obtain new credit, or make any large purchases. It’s an easy way to maintain your borrowing profile and work toward starting life in your new home.
Written by Bob Melone, radius loan officer