If you are thinking of buying a home, you probably need a mortgage. In order to get a mortgage, you’ll need to have the proper qualifications. It’s important to understand that once you qualify for a mortgage, it’s not ‘in the bag.’ You still have to tread carefully until you actually sign on the dotted line and take possession of the home.
Keep reading to learn the most common missteps homebuyers make while in the midst of the mortgage process.
Don’t Skip the Pre-Approval Step
First, we highly suggest that you don’t skip the pre-approval process when you shop for a home. While you might think that you are a ‘shoe in’ for a mortgage, lenders may not agree. You will have no idea which program lenders will give you or how much money you can borrow unless you go through the pre-approval process.
The pre-approval process is the start of the underwriting process. You will submit all of your mortgage documents including:
- Paystubs for the last 30 days
- W-2s for the last 2 years
- Tax returns for the last 2 years (if you are self-employed or work on commission)
- Asset statements for the last 2 months
Lenders will use this information along with your credit report/credit score to determine which loan program you qualify for as well as how much loan you can borrow.
The pre-approval is good for 60-90 days depending on the lender. This gives you ample time to shop for a home and complete the underwriting process once you place a bid on a home.
Don’t Ruin Your Credit After Getting Pre-Approved
Once you get pre-approved, it’s important to ‘ freeze your credit.’ Your lender based your pre-approval on a snapshot of your credit at that time. If you go and change things drastically, you could lose your approval.
So how do you avoid ruining your credit? Use the following tips:
- Don’t apply for new credit cards
- Don’t close your existing credit cards
- Don’t pay your bills late
- Don’t accrue any new collections or judgments
- Don’t overextend any of your existing credit lines
If you act as if you froze your credit, your credit score should stay within the same range that it was in when you applied for the loan.
Don’t Make Large Purchases After Getting Pre-Approved
Along with leaving your credit untouched, you should avoid making any large purchases after you get pre-approved. This is for two reasons:
If you buy on credit, you could damage your credit score and increase your debt ratio
If you deplete your assets to pay cash for the purchase, you may not have the necessary money for the down payment or closing costs
Large purchases can only hurt your chances of mortgage approval. Remember that lenders will pull your credit again before you close on the loan. You can’t sneak a large purchase by them because they will be able to see it on your new credit report right before closing.
Don’t Make Large Deposits in Your Bank Account
You might think that the more money that is in your bank account, the better off you will be. While that can be the case ‘somewhat,’ there are rules you have to follow. Lenders track every deposit that goes into your bank account. If the deposit doesn’t coincide with your income, lenders will need to know the source of the funds.
This limits the deposits that you can make. We aren’t talking about a few hundred-dollar deposit here, though. Instead, we are talking about large deposits that could potentially be from a loan that you took out in order to make a down payment or pay the closing costs.
Lenders will ask for a paper trail regarding any deposits. If you have a paper trail for something, such as the sale of an asset, then it will work. If you don’t have a paper trail though, a large deposit could cause you to lose your loan approval.
Don’t Change Jobs
Lenders will verify your employment when they first approve you for the loan, but they will do it again before you close on the loan. Oftentimes, there are 60-90 days between your original mortgage approval and the closing. A lot can happen within that time with your employment. If you change jobs, it could change the entire landscape of your loan.
If you do find that you have to change jobs for one reason or another, make sure you are honest with your lender. Ask your lender their policy for changing jobs and what you can do to minimize the risk of losing your approval. Sometimes it’s something as simple as being at the new job for 30 – 60 days before the lender can use the income.
Don’t Take Out New Loans
Even though you think you have your approval in hand, lenders are going to double check everything again before you close. This includes any new loans that you may have taken out. Lenders will know right away if you took out a loan in one of two ways:
- The loan shows up on the credit report that the lender pulls right before the closing
- The credit report shows an inquiry which suggests that you applied for a loan which will cause the lender to investigate further
A new loan can damage your credit score as well as increase your debt ratio. The combination of a lower credit score and higher debt ratio could leave you without your loan approval.
These common mortgage missteps happen often and ruin the approval buyers once had for their loan. The right thing to do once you get pre-approved for a loan is to leave everything as status quo as possible. This way you can keep your approval.