Just one negative item on your credit report, such as being more than 30 days late with a payment, which is reported to the credit bureaus, can cause either rejection of a mortgage application, or loan approval at an above-market interest rate.
The primary reasons applicants are “declined” for mortgages include (1) no credit file (usually because the applicant pays cash and has little or no established credit); (2) insufficient information in the applicant’s credit file; (3) insufficient income; (4) short time on the job – at least two years in the same field are usually required by most lenders; (5) slow pay and/or poor credit history indicated by a low FICO score; (6) judgments, garnishments, liens or past bankruptcy; (7) accounts sent to collection agencies; (8) current bankruptcy, which is not discharged; (9) foreclosure; and (10) repossession (usually an automobile or furniture). No credit or insufficient credit can often be overcome, such as by showing timely payment of rent and utilities. But the other reasons for “decline” are usually more difficult.
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However, I must hasten to add there are some mortgage lenders who will approve loans to applicants who have these “credit challenges.” But such lenders will charge high interest rates to compensate for their very high risks.
DON’T CO-SIGN OR GUARANTEE ANOTHER PERSON’S CREDIT. If you are asked to co-sign or guarantee another person’s loan, please don’t do it except for a person you 100 percent trust. All the credit obligations co-signed or guaranteed by you will appear on your credit reports. If the primary obligor fails to pay, or pays late, the non-payment or late payment will show up on your credit reports and your credit rating will be adversely affected. You will also be expected to pay if the primary debtor doesn’t pay! Even if you pay, but the payment is late, your FICO score will be harmed.
Also, if you let someone take over your debt obligation, unless the creditor gives you a written release of liability, you still remain liable and the obligation will continue to show up on your credit report. If you are buying a home, for example, and you agree to take over the existing mortgage already on that property, that mortgage will still show up on the home seller’s credit report unless the lender provided a written release of liability. As the home buyer, you probably don’t care. But if you are the home seller, be sure to get a written release of liability just in case the buyer doesn’t make the mortgage payments on time.
EXAMPLE: A few years ago, I sold a three-unit building to my good friend Art for nothing down. Art took over the payments on its existing mortgage of several hundred thousand dollars. Fortunately, Art has great income and great credit. He paid every mortgage payment on time. However, that mortgage still showed up on my credit reports until Art eventually sold that property and the mortgage was paid in full. Because of Art’s on-time monthly mortgage payments, my credit history was strengthened. However, if Art were a deadbeat, my credit scores would have been adversely affected.
No matter how much you love the person who requests your help with co-signing or a guarantee, please realize if that person doesn’t pay, your credit will be harmed and you will be expected to pay. It’s great if you want to help your son or daughter buy a home; just be sure they will pay on time because if they don’t, your credit will be hurt.
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