If there’s one piece of credit advice you hear when applying for a mortgage it’s something along the line of “Whatever you do, don’t go out and apply for more credit while your VA mortgage is being processed” or similar. But you may be wondering exactly why your loan officer asks you to put off any new credit purchases and there are two primary reasons why. One is obvious, one not so much.
The primary reason you’re asked to refrain from applying for new credit is to keep your debt to income ratios in line while your loan is in the approval stage. The VA asks that lenders approve VA loans limiting monthly credit obligations, including the new VA loan, to 41% of gross monthly income. Say that your debt to income ratios are right at 40 and you go out and buy and finance a shiny new boat, that could put your debt ratios above the guideline even though the new monthly boat payment won’t show up on your credit report for at least another 30 days. That’s why loan officers ask that you stay on the sidelines as it relates to new credit.
The second yet no so obvious reason is when lenders review your credit report, they will primarily be concerned with your credit score and not so much the individual monthly payments as long as your debt ratios are in line. And right before your loan papers are drawn and sent to the settlement agent, the lender will review an updated credit report and look for new credit inquiries. Each time you apply for credit, it’s noted on your credit report almost immediately. If there is a new inquiry on the credit report made after you submitted your original loan application, the lender won’t draw your closing papers without a written explanation from you regarding the new inquiry.
Even if you didn’t take out a new loan your lender will ask for an explanation. Again, in writing. “My husband was looking for a new car but we didn’t buy one until we get rid of our current car” or some such explanation. Taking on new payments after you’ve submitted an application can affect your debt ratios and simply applying for new credit can put the brakes on any VA loan.