Q: My husband and I lost a home to foreclosure four years ago. We have talked to several real estate agents and mortgage specialists, and we’re receiving conflicting information. One company reviewed our credit report and highlighted two creditors we needed to pay off in order to bring my husband’s credit score up from a 620 to a 650, telling us that it would take six to nine months for this to reflect on our credit report — then we would qualify for a home loan.
Just recently we attended an open house and spoke to a mortgage broker who was there; he said we should not have paid off the two debts completely, but should have just paid them down instead. He also reviewed our credit reports and highlighted more debt he felt we should pay, and told us we wouldn’t qualify for a loan until five years after the foreclosure.
The conflicting information we are receiving is creating a roadblock for us. Do we wait a couple more months, in hopes of my husband’s credit score rising, or do we resolve more debt and wait until five years post-foreclosure? –Chaky
A: Whew! You sure have a lot going on. First things first: What’s the rush? I’m going to suggest that you slow down and take a very cautious, deliberate approach to both choosing your mortgage professional and actually preparing to qualify for a home loan.
Both the mortgage application process and the house-hunting process move very slowly these days — probably much more slowly than when you last bought a home. Buyers hunt for houses longer and transactions take longer to close escrow now than they have in decades, maybe ever. On today’s market, the difference between 4.75 years and five years is virtually nothing. I wouldn’t let that be a concern.
I would be much more concerned about where you get your mortgage advice. Mortgage brokers pull their own credit reports, and the report they pull will be the one the lender ends up basing its decision on.
Also, different mortgage brokers might have different loan programs in mind for you, which might explain why they provided you with different post-foreclosure waiting periods. FHA loans can be had as soon as three years following a foreclosure, while some conventional (non-FHA) loans require a five-year wait.
Bottom line: They might not be comparing apples to apples, and you’re probably not, either.
How did you pick the first mortgage pro you worked with? If you picked one by referrals from friends and family members, or even a trusted broker or agent, who has successfully worked with him/her in the past, then you might want to continue following his/her advice.
I wouldn’t personally let the fates of my homebuying process rest on advice from someone I just happened to run into at an open house, unless I was already having concerns about the advice I was receiving, or unless the open house mortgage person came off as particularly authoritative, or provided me with very compelling references, whom I’d spoken with first.
That’s not to criticize you for talking with the open-house mortgage broker or for allowing that mortgage person to look your materials over. I’m just advocating a referral-based approach to selecting your mortgage broker.
Every pro you work with will have a different course of action they recommend, so if you want to avoid the drama of conflicting advice, you’d do well to get strong referrals to a mortgage broker who has actually closed mortgages for people you know recently, then pick one and work the program together.
The fact is, while I don’t encourage you to select a mortgage broker just because you met him in an open house, on the street, or even in a bank’s branch, the open-house mortgage broker is giving you sound advice in some ways.
Paying debts entirely off, unless they are accounts in collection, does not optimize your score; neither does closing accounts. The FICO score algorithm gives maximum credit to accounts that are being utilized responsibly, with balances maintained at or around 30 percent of the available credit, rather than just sitting at zero balances — this credit utilization ratio might explain why some mortgage pros would advise spreading $10,000 around to pay five different bills down to 30 percent of their available credit, rather than just paying off a single $10,000 debt.
Also, with the rapid rescore procedure, whereby you can pay something like $50 to a mortgage broker and have him request a rescore of your credit history in a couple of days, it’s not the case that you’d need six or nine months for your credit reports to reflect the debt reduction you’d completed, as you perceived your original mortgage pro as stating.
With that said, some mortgage folk subscribe to a credit agency service that spits out recommendations they can provide you of changes to your debt and credit record that will get you a particular credit-score boost. Your original mortgage adviser might have simply been telling you what you needed to do to get to 650, based on that service, while the other mortgage person was giving you overall FICO score optimizing advice.
I’d suggest — given that you seem to be working to come out of a time of financial distress — that reducing your debt overall might not be a bad financial move, keeping in mind that paying everything off and/or closing accounts is a bad move for credit-score and loan-qualification purposes.
I’d much rather you took your time and made sure all your financial ducks were in a row — that your family’s finances were fully healed, so to speak, before you buy a home — than to rush into this housing market because you perceive there to be some urgent reason to do so. The fact is that housing prices are going up very slowly, if at all, in most markets, so there’s really no rush.
Rather than trying to figure out which end is up or to reconcile the apples-and-oranges advice you’ve received up to now, I urge you to get referrals — from family members, friends and colleagues — to a mortgage pro they can vouch for, with whom you can work to put a firm action plan in place.
