One of the first things you want to do before looking for a house is get pre-qualified by a mortgage lender.
However, getting pre-approved for a mortgage and even under contract does not guarantee approval. Loan pre-approval is not loan approval. So, you will need to make sure to not make these common mistakes.
Otherwise, buyers can inadvertently add obstacles to final loan approval or even guarantee that their loan will be declined between contract and closing day.
Buying big items with credit
It’s a Realtor’s and mortgage lender’s worst nightmare, but it happens all the time. If you are buying a house, don’t buy a truckload of furniture until after your loan closes. This applies not only to sofas and settees but also to obtaining credit for any major expense, such as a car, a boat or new bedroom set.
Be careful with even minor expenses. If you absolutely need to obtain new credit or accrue debt before closing, talk with your loan officer as soon as possible. Surprises are not good in the mortgage process.
New payments are going to affect your monthly debt-to-income ratio (and residual income on a VA loan), and not in a positive manner. Hard inquiries on your credit report also could lower your credit score. That might hurt your interest rate if you have not locked or even knock you out of qualifying range all together.
Moving money between accounts
Lenders will scour your most recent bank statement as part of the pre-approval process. It’s not like they forget about it after that. They will re-evaluate your bank statements before closing. This includes another look at your assets and bank records again during the underwriting process.
You will need to explain any unusual deposits or withdrawals. Lenders will require clear documentation and a paper trail if you are putting gift funds toward a down payment or closing costs. Stuffing a wad of undocumented cash into your account is never a good idea.
Paying bills late
Having a late payment hit your credit report before closing can cause irreparable damage to buying your new home. Payment history comprises about a third of your credit score.
Just one 30-day late payment can reduce your credit score by 60 to 110 points. Unless you have an 800 credit score, this could completely derail your deal.
If that 30-day late blemish is a mortgage or rent payment, some lenders will decline your application altogether. Most lenders require at least 12 consecutive months of on-time payments to qualify for a home loan.
Co-sign on a loan
Co-signing on a loan is really never a good idea, but it is significantly worse if you do it while trying to buy a house. By co-signing on a loan for someone else, you are now responsible for that debt. These payments will now factor into your debt to income ratios.
Hopefully this goes without saying, but losing your job is going to be a big problem. Even job-hopping can present some major hurdles. Lenders need stable, reliable income that’s likely to continue to get you final approval.
The bottom line: Any change to your employment is significant. Keep your loan officer in the loop and ask questions when in doubt. The last thing you want is to waste time and money on a home loan you’re never going to get.
Throughout the mortgage process, it also can be helpful to monitor your credit scores for changes so you can know whether you need to address any problems.
For more real estate information, visit our New Home Communities.