You could hurt your home loan application by taking on new debts, changing jobs or otherwise calling your financial stability into question.
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If you’re ready to shop for a new home, a mortgage preapproval letter shows sellers that you’re a serious buyer who can secure financing from a lender. It also gives you a clear idea of how much you may be eligible to borrow.
To show lenders that you’re a qualified borrower, you’ll need personal identification, pay stubs, bank account statements, a list of your monthly debts, tax returns, W-2 statements and information about your down payment. You’ll also need to submit to a credit check. Most lenders require a credit score of at least 620 for a conventional mortgage, but a higher score will increase your chances of getting preapproved and can lead to lower rate offers.
The lender may also verify your history of making your rent or mortgage payments on time. Depending on whether the lender has additional questions and how much of its preapproval process is automated, accepted borrowers can expect to receive a preapproval letter anywhere from a few hours to a few days after applying.
Even if you have all of the required documentation and a qualifying credit score, don’t take the application process for granted. Lenders will be scrutinizing your financial readiness. Avoiding potential pitfalls will help keep your homebuying goal on track.
Buying a home is an exciting milestone! After months of searching, you’ve finally found your dream house and submitted a mortgage application. While it’s tempting to celebrate and make big purchases for your new home, it’s crucial to avoid major financial changes during the mortgage process.
I’ve helped many clients secure their mortgages over the years. Here are the top 10 things not to do after applying for a mortgage
1. Don’t Deposit Large Sums of Cash
Lenders need to verify where your money is coming from. Random cash deposits can raise red flags and delay approval. Before depositing any lump sums, consult your loan officer on how to properly document the funds. Any deposits should be at least 60 days before applying.
2. Don’t Open New Credit Accounts
Adding new credit cards or loans can negatively impact your credit score, which lenders examine closely New credit accounts lower your average account age and increase your debt – two factors that can decrease your score. Avoid applying for new credit until after closing.
3. Don’t Make Major Purchases
It may be tempting to buy new furniture or splurge on a vacation before your mortgage is finalized. However, large purchases impact your debt-to-income ratio, which could jeopardize your approval. Wait until after closing to celebrate with major expenditures.
4. Don’t Co-Sign Other Loans
Co-signing makes you legally responsible for repaying the debt if the primary borrower defaults. Even if you aren’t actually paying, lenders will include the monthly payments when calculating your debt-to-income ratio. This can lower the amount you qualify to borrow.
5. Don’t Change Jobs
Having steady employment and income is key for approval. Switching jobs or transitioning to self-employment can raise concerns about instability. If possible, avoid changing jobs until your mortgage is secured. If unavoidable, consult your loan officer beforehand.
6. Don’t Omit Sources of Income
Failing to disclose all your income sources is mortgage fraud. Even if it’s side work or rental property income, it must be reported and documented. Omitting sources can lead to denied applications or other serious consequences. Disclose all income upfront.
7. Don’t Make Late Payments
Your payment history carries significant weight for lenders. A single late payment can damage your credit score overnight. Set payment reminders and maintain your stellar payment history until your mortgage is finalized.
8. Don’t Close Existing Credit Accounts
While minimizing open accounts may seem beneficial, closing accounts actually hurts your credit utilization ratio and lowers your score. Keep accounts open, pay off balances, and use them sparingly until after closing.
9. Don’t Transfer Money Between Accounts
Frequently shifting money between accounts can raise suspicions of borrowing from friends or family. Lenders need to verify money trails, so it’s best to minimize account transfers. Keep funds in your documented accounts until after closing.
10. Don’t Apply for New Housing
If your mortgage application is already in process, resist the urge to explore other properties. Submitting multiple mortgage applications is seen as high risk. Stick with your original home purchase until it’s finalized.
The mortgage process involves meticulous financial evaluation. Be cautious about making any major money moves after applying. Maintain the status quo and consult your loan officer before acting. With prudence and patience, you’ll be enjoying your new home in no time!
Don’t take on any new debts or lines of credit
Lenders want to see that your finances are stable, including your obligations to creditors. Avoid making large purchases on credit or opening additional credit lines, including new credit cards.
“Making large purchases, such as buying a car or expensive furniture on credit, can significantly impact your debt-to-income ratio” says Matt Vernon, head of consumer lending at Bank of America in Charlotte, North Carolina. “By taking on more debt before obtaining preapproval, you could potentially exceed the debt-to-income ratio threshold that lenders are comfortable with, making it harder to qualify for the mortgage amount you need or to obtain favorable terms.”
Don’t create job or income instability
“Lenders prefer borrowers with stable employment and income histories because they view them as less risky,” says Vernon. He adds that changing jobs or having irregular streams of income can alarm lenders and jeopardize your application, even if your income is higher as a result.
If your income fluctuates or is unpredictable — for instance, if you’re in a commission-based role or self-employed — you will also need to demonstrate that your earnings are consistent enough to make your monthly mortgage payment, says Steve Kaminski, head of U.S. residential lending at TD Bank, also based in Charlotte.
What not to do after you apply for a mortgage – Mortgage mistakes to avoid.
FAQ
What should you not do when applying for a mortgage?
- Don’t take on any new debts or lines of credit.
- Don’t create job or income instability.
- Don’t make large deposits without documentation.
- Don’t rush the process.
What is the 3 7 3 rule in mortgage?
What is a red flag in a mortgage?
Understanding the Mortgage Application Process
Once the application is submitted, the lender will review the information and conduct a credit check. This is where potential red flags could be raised. Red flags are issues or inconsistencies in the application that could potentially hinder the approval of the loan.
What looks bad on a mortgage application?
Poor credit score. Too much debt. Too many recent credit applications. Not being registered to vote at your current address.
What should I avoid when applying for a mortgage?
Avoid opening new lines of credit, closing credit lines, co-signing on loans, or making major purchases with credit cards before or during the mortgage loan process. Whatever your finances, be sure to include all debts and liabilities on your mortgage application. Honesty is always the best policy!
What should I do if I’m not applying for a mortgage?
Even if you’re not applying for a mortgage immediately, there are still actions you should take now to prepare: Focus on your credit. Correct any credit reporting errors, improve your credit score by paying all bills on time, and don’t open or close any credit accounts. Pay down debt and start saving.
What should I do if I see something inaccurate on my mortgage?
If you see something inaccurate, contact the credit agency to resolve the issue. Avoid opening new lines of credit, closing credit lines, co-signing on loans, or making major purchases with credit cards before or during the mortgage loan process. Whatever your finances, be sure to include all debts and liabilities on your mortgage application.
Should you quit your job to get a mortgage?
Applying for a mortgage is all about showing stability. The process goes more smoothly if you keep your job and income steady, while avoiding major changes like quitting your job. Don’t worry about getting a pay raise or a promotion, though—those are the exceptions to this rule!
Is the mortgage process stressful?
The mortgage process can be stressful … we know. Bank statements, credit scores, interest rates, loan estimates, closing disclosures, and more can really bog you down during the homebuying journey.
How do I get a mortgage approved on time?
The key to getting a mortgage approved on time often comes down to the level of responsiveness from the borrower. Now is the time to focus on saving—not spending—your money. You may need funds available for things like an earnest money deposit, a down payment, or closing costs.