Over the Edge: The Mistake that Can Force You into a Bad Credit Mortgage

By Gina Pogol
Mortgage Credit Problems Columnist

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Somewhere between the borrowers with obviously good credit and those with patently bad credit are borrowers who could go either way. If you're a borrower on the edge, one mistake could push you from barely good to bad. The error of financing big-ticket items before shopping for a mortgage could force you into a bad credit mortgage.

Loan officers see this all the time: Clients move into a new town, get jobs or promotions, marry or divorce--and want a fresh start. They shop for everything at once: new house, new car, and new furniture. Their loan consultant pulls a credit report and finds a disaster of multiple inquiries and brand new accounts with great big balances.

Shop 'til it drops: your credit score, that is. When you finance a car, electronics, or furnishings, the dealer often sends your credit application to a slew of lenders, and each of them may pull your credit report--generating lots of score-lowering inquiries.

New accounts plus big balances equals bad credit. The irresistible new car, roomful of new furniture, or plasma TV, and the accompanying enormous account balance can kill the deal for your conventional mortgage lender. While long-held accounts with low balances have a positive effect on your credit score, the reverse is also true--a new account with a huge balance can only push your score down.

Your back end gets ugly--except to a bad credit mortgage lender. Your back-end ratio equals your total monthly payments divided by your monthly gross income and should fall somewhere between 28 and 34 percent to obtain a good credit mortgage. For a marginal borrower there is no deviating from this requirement. Don't buy that SUV if the payment makes your monthly debt service too high or you'll end up with a bad credit mortgage.

Be smart. Close on your mortgage first, put off large purchases until your financial position improves, and become a solid "good credit" borrower.

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