You've decided it's time to take the plunge and buy a home - great! You're even ahead of the curve and got pre-approval before your home search - amazing! And, now you've found the home of your dreams, made an offer and it was accepted - Fantastic! But, all these wonderful events could come crashing down like dominoes if you're not prepared for the mortgage application process and you could find your loan application denied and the deal falls through. But, don't worry! We're going to give you 6 things to avoid after your mortgage application to ensure the process is as smooth and stress-free as possible.
1. Applying for New Credit Cards or Other Loans
One of the requirements of mortgage loan applicants is that you maintain your credit score and financial status for the duration of the loan approval process. For that reason, any additions to your credit or debt will change your debt-to-income ratio and can cause issues.
Applying for new credits cards or a personal loan, regardless if they're directly related to the purchase of a home, will cause a credit check to be run and affect your FICO scores and could significantly lower them. Bad credit scores can affect mortgage rates, your mortgage payment and eligibility for approval.
Not only that, you can still be denied a mortgage once pre-approved as your credit report is checked during pre-approval and just before closing.
On the flip side of this is actually paying off debts and closing the account. While paying off debts is ok, closing the account will remove the credit history and can affect your approval. It's important to maintain a length of credit history whenever possible. It may not ruin your chances at a loan but will affect how much home you can afford.
Our best advice is to simply wait until after closing to open any new credit accounts.
2. Changing jobs and/or the way you're paid
When you apply for a mortgage, the loan officer tracks the amount and source of your annual income. One thing to keep in mind about the entire mortgage application process is that they're going to be looking for a consistent source of income, low debt-to-income ratio and a solid credit history. For that reason, you should avoid anything that could change the way those items appear for the worse.
Anything that could affect your income history like changing jobs, switching from a salaried to hourly or commission-based position or becoming self-employed are all things that could cause issues with the application process and even result in being denied.
3. Making large bank deposits
Lenders typically want to see a steady financial balance of at least two months so large deposits directly before speaking with a mortgage lender can reflect negatively on your loan application. Because lenders need to source your assets and as cash is difficult to trace, make sure you've spoken to your lender to ensure any large sums of cash are properly documented.
There's no way to disguise a loan and we certainly don't suggest trying! Having family assist in the purchase of a home with something like downpayment assistance is fine. However, rules apply to being gifted monetary items and must be documented properly.Verify you're not expected to pay back the money with a gift letter and documentation so it's obvious the income is not disguised debt.
One more thing to note is that bonuses or tax refunds are a non-issue and are considered transparent deposits. However, if the income is from the sale of an item such as old furniture, etc. - plan to provide a bill of sale or cancelled check to your mortgage lender.
4. Be a co-signer on anyone else's loans
Co-signing on a loan makes you partially responsible for any debt the loan involves. And since any additional debt you incur during the application process affects your debt-to-income ratio, it limits the amount you can borrow.
Additionally, if the borrower makes late payments of is unable to maintain the payments on that loan, your credit score becomes affected as well.
While we understand the need to help others when we're able, it's best to wait until after closing for any co-signing efforts or look for alternatives.
5. Make Major Purchases
While new appliances, furniture and other items for the home you expect to close on seems like a great idea, any instance where you use credit, take out a loan or decrease your available cash can affect your debt-to-income ratio. And, adding any new monthly payments can be seen as risky for loan officers and cause them to reject your application.
Our recommendation? Keep a running list of all the things you can't wait to buy or need for your new home - but wait to purchase them after closing.
6. Change Bank Accounts
There may arise a need to shift funds around to pay for closing costs. If you need to transfer money between accounts, consult with loan officer first so assets can be tracked properly.
Don't close or open new accounts until after closing so the process of tracking/sourcing income and assets remains as simple and easy as possible. Doing so before closing could cause you to have to restart the process, waiting at least 60 days and providing a letter of explanation before proceeding.
As we mentioned before, of all six of these very important things to avoid - maintaining a steady income, a low debt-to-income ratio and a solid credit history are the common threads running through it all. Maintaining a solid payment history and paying your bills on time will help you significantly increase your chances of loan approval.
If you heed this advice, think through any financial decisions that need to be made during the mortgage application process and listen to the advice of your real estate agent and loan officer; you'll find yourself on a smooth journey to the closing table and moving into your new home before you know it.
If you have any additional questions about the home buying process, don't hesitate to get in touch!
In the meantime - consider using our handy free mortgage calculator to estimate your monthly mortgage payments.