When buying a house, the worst thing you can do is jeopardize your financing. Imagine the deal falling apart a week before closing on your dream home! Make sure you avoid these common mistakes, so that you don’t end up getting your loan application denied.
1. Don’t change your job or employment status.
Bad day at work? Don’t even think about putting in your notice! Lenders consider your job history and stability when verifying that you have sufficient income to afford the mortgage. Discuss any potential changes or gaps in employment ASAP with your loan officer. While certain job changes might be acceptable, others (such as contract work, self-employment, or commission-based roles) could derail your financing altogether. Any change in employment is risky.
2. Don’t make any major purchases.
Buying a house is often prompted by other life changes: getting married, starting a new job, moving across the country, having a baby, receiving an inheritance, etc. And these milestones might prompt additional purchases, such as a new car, jewelry, furniture, appliances, or vacation packages. Pause! Lay off the big purchases until after you close on your home. These transactions can lower your credit score and impact the interest rate or the loan amount you qualify for.
3. Don’t miss any payments.
Missing a bill or debt payment can torpedo your mortgage application, especially if a collection or judgment shows up on your credit report. This can drop your credit score and reflect negatively on your application. For lenders, consistently paying bills on time demonstrates reliability.
4. Don’t increase your credit card debt.
Credit card utilization is a huge factor in your credit score. Racking up more charges on a credit card can disqualify your mortgage application. Not only does it change your debt-to-income ratio, it will drop points from your credit score, big time. This will potentially raise your interest rates on the loan, if you still manage to qualify. Aim to keep your credit card utilization rates between 15-30%, ideally.
5. Don’t apply for any new credit accounts.
This should go without saying, but opening a new credit card will cause your credit score to take a hit for a while. That 10% savings you get for opening a new store credit card could cost you thousands in the long run on your mortgage, due to higher interest rates as a result.
6. Don’t change or close any accounts.
Perhaps you listened to Dave Ramsey and plan to cut up your credit cards to avoid going into more debt. That’s great, but don’t make drastic changes or close any accounts until your home loan goes through. Closing accounts could negatively impact your credit, too. Lenders like consistency, so continue using your bank accounts as you normally would. Notify your loan officer if you are a victim of fraud or theft, or need new accounts issued for any reason.
7. Don’t co-sign on anything.
When you co-sign a loan of any type (such as financing a car payment, or an apartment lease), you take on all the responsibilities that come with it, even if the primary borrower defaults. This means that co-signing can affect your credit score and debt-to-income ratio, and ultimately limit your ability to qualify for a mortgage as a result.
8. Don’t spend any money you’ve put aside for closing.
As tempting as it might seem to shuffle money around, don’t risk losing your dream home by coming up short on cash at the closing table. When you and your lender determine your closing costs, set that money aside. Be sure you can cover the down payment as well as other fees, and still have some reserves left over. Little expenses add up!
9. Don’t make any large, undisclosed deposits or transfers.
Large deposits of $1,000 or more need to be clearly documented and verified by your lender. Loan underwriters may see large deposits and question whether the money is borrowed or gifted, indicating you are less likely to afford a mortgage on your own. If someone is contributing toward your down payment, be sure to discuss these details in advance with your loan officer to avoid problems or delays down the road.
10. Don’t do anything that requires the use of your Social Security number.
The risks of identify theft are real, and home buyers are routinely targeted for wire fraud. One way to minimize having to recover from ruined credit, or remedy fake IRS tax returns, is to avoid providing your Social Security number to anyone. This helps ensure that your background check comes back clear, and there are no surprise obstacles to financing.
It’s important to get your finances in order as soon as you start thinking about buying a home. Begin with talking to a trusted Mortgage Broker or Loan Officer about your individual situation. And if you become aware of any potential problems or concerns, consult with an expert right away.