Since Halloween is coming up, I thought it would be a good time to do a post about mortgage credit nightmares and how to avoid them. These are true stories although the names have been changed to protect the stupid....

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Haunted by the past

Bill was a smart guy with a great job and decent credit. He and his real estate agent came in to get pre-qualified before shopping for a home. I determined that he could afford a home in the $300,000 range. He chose not to get pre-approved (which involves submitting a mortgage application with income and asset documentation and pulling a credit report) at the time because he was still shopping his mortgage and didn't want to give out his Social Security number. Bill found a home that he loved, made an offer, and we started processing his 100% USDA home loan. And then the credit crap hit the fan. Turns out that he had defaulted on a student loan fifteen years before. Bill thought that because the debt was so old, the statute of limitations in his state on debt collection (4 years) meant that he no longer owed this money. He was wrong.

Anyone who owes back taxes or has defaulted on any federally-backed debt should understand that they will not be able to get a government loan until the debt is resolved. Even if they do not have bad credit. Here's the Federal law, which trumps all state statutes: Section 484A(a) of the Higher Education Action provides that no statute of limitations bars enforcement action to collect Federal student loans, including collection by offset, lawsuit, or enforcement on student loan judgments. 20 U.S.C. �� 1091a(a). State law that would otherwise limit these actions is superseded by Federal law and cannot bar collection action.

Guess what? Bill could not get a USDA loan unless he got on a student loan repayment plan. He was not able to buy the home he wanted so badly even though his credit score was good. Rule #1: Always get pre-approved (not merely pre-qualified) before shopping for a home. Rule #2: The Federal government is the world's most persistent creditor. Suck it up and pay them.

Night of the living debt!

Then there was Renee. She was pre-approved for a bad credit mortgage, and intended to refinance as soon as her credit score improved. She found a home, gave notice to her landlord, and began packing. She excitedly bought furniture, appliances, and a BMW convertible (?!). All on credit, and all at very high interest rates. Guess what? A home loan approval, even a bad credit mortgage loan approval, is issued based on the information in the application package. And once all these new debts were discovered (the underwriters pulled a second credit report), her approval went up in smoke and she could not get a mortgage and could not buy her home. She just didn't earn enough to support all the new payments and the proposed house payment.

I have seen this and a related scenario happen time after time. Often, it's young adults who have been living with their parents and have not had to worry about paying rent. So they buy big new trucks with a James-Bond-ian list of options and payments that exceed the defense budgets of small countries. No one has told them that if the car payment takes up one-third of their income there is no way they can afford a house. Rule #1: Public transportation builds character. Rule #2: Stop feeling so entitled already!

Zombie creditors

This scenario illustrates why you need to review your credit report for errors before applying for a mortgage. You think that you got away with bouncing a check to the pizza guy back in college, but guess what? He turned it over to a collections company, and the collectors bugged you for a while until you changed cell phone numbers. After adding on a couple hundred dollars in interest charges, penalties, and collection fees, the company sold your debt for pennies in the dollar to another company, which did the same thing and then sold it on, while you had no idea. Then your lender pulled your credit and guess what? The world's most expensive pizza has turned up on your credit report seven times and has been reported by all these collection companies. And the last one is still pushing! Many lenders will require that you pay this thing before allowing you to close on your home loan. Rule #1: Check your credit early and often. Rule #2: Don't stiff the pizza guy.

Want to avoid these and other nightmares? Get yourself a smart lender. You can find one by completing the fast form on this site.