Now that the credit bureaus have removed some people’s tax liens and civil judgments from credit reports, people are asking, “Should I tell my mortgage lender about the item that no longer shows up on my credit?”
The same question applies to a bankruptcy that has been deleted early from a credit report.
First, let me say that even though you had this negative credit event, the fact that it is not on your credit report gives you a higher credit score. This is to your advantage. You will qualify for a better interest rate with your higher score.
Are You Like Person One or Person Two?
It sounds crazy, but let’s look at how the almighty credit score affects two people who had a bankruptcy (BK) two years ago.
Person One’s BK shows up on his credit report. His score is 580.
Person Two’s BK does not show up on his credit report. His score is 620.
Both people qualify for a FHA loan, but Person One gets an interest rate of 4.5% while Person Two gets an interest rate of 4%.
On a $200,000 loan, Person One pays $59 more per month and $708 more per year — all due to the difference in credit score — even though their bankruptcies are the same!
So not having the BK show up on your credit report is a big advantage, even though you will have to disclose it.
Should You Tell Your Loan Officer About the Negative Credit Event?
The answer is a big YES. You must answer all questions truthfully. Lying on a mortgage application is fraud, and carries a possible felony charge.
Besides, you won’t get away with the lie. The lien/judgment/BK will be revealed when the underwriter pulls a different type of report tied to your social security number. Then your loan in progress will change and could possibly even be denied. For example, if Person Two started with a conventional loan, then it was discovered he had the BK, the loan would have to start all over again with an FHA loan. Even the appraisal report would need to change to match the loan program. This will cause grief and a lot of extra work, and likely delay closing.
Honesty is the Best Policy
The adage is true: honesty is best. Your loan officer is your advocate. Your loan officer wants to give you a loan and close the deal so he/she earns a commission. Tell all your credit secrets to the loan officer right up front so there are no bad surprises later and then you’ll have a better loan processing experience, too.
I have closed plenty of loans for people who had a negative event on their credit report, so please, don’t let that stop you from applying for a home loan if you also have some positive credit and a score of at least 580. Naturally, your income and other criteria will need to qualify. But you might be surprised — perfect credit is not required to get a home of your own.