First time home buyers (and even repeat home buyers) are often surprised at what happens AFTER they are pre-approved for a home loan. In fact, numerous people ruin their chances of getting a home by making simple mistakes once they hear the word “approval” from the mortgage lender. This article will point out some of the most common mistakes people make and most importantly explain things to avoid before closing on a home.
1. Do Not Start a New Job
Although it is not the most important item for getting approval, job history and length of time at your present employer are vital to getting approved for a mortgage loan.
If you have been at your current job for more than 2 years, wait until the mortgage loan is closed and you have moved into the home before choosing to switch to another company. If a switch absolutely has to happen, make sure you are having frequent update conversations with your lender so they can help troubleshoot before it’s crunch time.
2. Do NOT Purchase a New(er) Car
It is so easy to understand the temptation to buy a vehicle after getting a mortgage pre-approval. Most people are a bit nervous and are filled with excitement when they learn that a mortgage lender has offered them a chance to buy a home. If their credit and income are good enough to buy a home, then surely it is good enough to get a great deal on a car, right?
The pre-approval issued by the lender was determined by the current level of debt and income at the moment the person applied for the home loan. Getting a new loan for a car changes all of that.
It is best to wait until the loan has closed before trading up on your vehicle.
3. Do NOT Make a Late Payment on ANY Existing Debt
As previously stated, the pre-approval is determined by a snapshot of your credit at a particular point in time. The track record that you have is documented by the credit report used for your approval. The majority of lenders will request a new credit report for you approximately one or two days before the loan closing. Any late payment that shows up could be a red flag to the lender and cause them to turn down the loan.
So, to be safe, make all payments on time while waiting for the lender to finalize your loan.
4. Avoid Any Unusually Large Deposits
Just as your credit report shows a track record of your payments over time, your bank account also has a track record. The mortgage underwriter will review your checking and savings account to see if there are any larger-than-normal deposits in the months leading up to the purchase. Avoid any large deposits that do not coincide with your normal banking habits.
What is considered large? Let’s use some numbers to illustrate the point.
Suppose you get paid bi-weekly and your spouse gets paid weekly. Your net check is usually around $1,700 to $1,950 every other week while your spouse has a net check that fluctuates between $1000 and $1,175 each week. A deposit of $900 would not mean anything to the lender. But, a deposit for $4,000 would send up a big red flag because that is much larger than most of the previous deposits.
5. Do NOT Open a New Bank Account
We previously mentioned that you should not switch jobs or add any new debt. The theme is consistency and this point really drives that home.
Whether you have used your current bank for 6 months or 6 years, it is best to stick with that bank until the loan closes. Opening up a new account creates suspicion among mortgage lenders. They wonder if you are trying to hide funds in one account or if you have unrecorded debt obligations that are going to be facilitated with the new account.
6. Do NOT Spend the Funds Earmarked for Down Payment or Closing
Buying a home can be exciting but also stressful. Getting the utilities switched to a new address, changing the address with the post office and creditors, and hiring the movers can all take time and some funds. While you may have saved up a nice nest egg to prepare for the home purchase, now is not the time to spend all of that money.
The estimate provided to you for the closing is just an estimate. Things like property taxes, homeowner’s insurance, and other costs can creep up and cost a bit more than anticipated. It is an awful feeling to get a call from your lender notifying you of the closing date and the amount needed for the closing costs only to realize you don’t have the funds for the purchase.
7. Do NOT Close Out Any Debt Account
It is usually a good idea to pay down debt and close the account, whether it is a credit card, furniture account, or local store account. However, as we mentioned earlier about keeping your debt as is until the mortgage closes, the same applies here.
Closing out a credit card, for example, can lower your credit score. One factor of a credit score is the ability to quickly borrow money, also called capacity. If you have a credit card with an available spending limit of $1,000 and only a balance of $100, that means you have the capacity to borrow $900 in the event of an emergency.
However, if you pay off that card and close the account, you then lose the capacity. The capacity reduction can hurt your credit score.
The bottom line, leave all accounts open for the time being.
8. Do NOT Agree to Co-Sign on a New Loan
Earlier it was mentioned that new borrowers should avoid any new debt, especially in the form of buying a new car. This is also true for other new debts such as new credit cards, new furniture accounts, or an unsecured loan. This is especially true for being a co-signor on a loan.
If your mortgage lender told you that you were approved for a home loan, do not co-sign on any loan for a friend or relative until you have moved into your new home. Becoming a co-signer makes you 100% responsible for the new loan, regardless of the good intentions of your friend or relative. This one area is a big no-no for potential homebuyers.
9. Do NOT Ignore Requests from Your Lender
Think of a lender as a person very similar to you, they are merely trying to do their job. In this case, their job is to help you buy a home.
Sometimes a mortgage underwriter will ask for very specific things. It is not uncommon for an underwriter to request documentation supporting a sale of a car, a major change in job, or an explanation for one missed payment from 14 months ago.
If your lender contacts you and asks for some type of document or explanation, be prompt and thorough in providing the answer. Your entire loan could hinge upon this one item and you don’t want to get rejected because you could not find the time to respond to the lender’s inquiry.
Summing Up What To Avoid Before Closing on a Home
After you have received your mortgage pre-approval, continue on with your life as if nothing has changed. Keep in mind the 9 Things To Avoid Doing Before Closing, keep making payments on time, don’t shut down any accounts, and don’t add any new debt. Along with the other suggestions above, this should keep you prepared and ready for the final loan closing.