While buying a home is one of the most exciting and rewarding things you'll do in your life, it can also undoubtedly be one of the most stressful. This is due in no small part to the mortgage approval process which, at its best, is tricky and, at its worst, downright perplexing.
When I purchased my first home, I felt like I had sufficiently done my research. My confidence never wavered as I scrolled through Zillow listings, flagging homes with the same glee I reserved as a child for marking all my must-haves in the Toys 'R Us holiday catalog.
But then came time to get approved for the mortgage I would need to purchase my carefully-plucked-from-the-listings home, and things got hairy. There's a happy ending, since I ultimately did get approved. However, I can tell you from personal experience that it's probably much easier and involves much less nail-biting if you know going into the process about the things that can stall (or kill) your mortgage approval.
I didn't, thus the headache. So in the spirit of sharing is caring, I culled a few pointers as well as picked the minds of industry pros about what not to do when trying to get a mortgage.
1. Don't Keep a High Balance on Your Credit Cards
It's easy to think that as long as you've been making your credit card payments on time, they won't affect you negatively during the home buying process. That's not the case, though, cautions Randall Yates, founder and CEO of The Lenders Network.
"When you're going through the mortgage approval process, you will want your credit score to be as high as it can be. You should pay off the balances on your credit cards. The amount of available credit you're using is called credit utilization, and it makes up to 30-percent of your overall FICO score. High credit card balances will have a significant impact on your scores—try to get [the balance on each card] to under 15-percent of the limit to maximize your score before applying," explains Yates.
2. Don't Change Your Job Status
Whether you lose your job, go on maternity leave or even transfer into a new department and get a fancy new title, changing your job status can throw a big ol' wrench into your mortgage approval ambitions. Although there are certainly manual (aka human) underwriters, technology has made automated mortgage lending tools a reality. Unfortunately, such digital systems will often flag any recent job change as indication of a high-risk lender.
Wondering why that is? Well, it has to do with the fact that it's much harder for a lender to bank on your financial stability when you have work history gaps or have changed your career in any other way.
3. Don't Make Any Big Purchases
You're making just about the biggest purchase you can make, which should be reason enough not to overburden your budget. Alas, we humans don't always make rational decisions, and sometimes we simply want what we want. If you want to secure a mortgage approval, though, you're going to need to want less... at least for a little while.
"When applying for a loan, debt-to-income ratio is important—if you just barely qualify, one purchase can mean the difference between getting approved or not. Too often, homebuyers inadvertently create financial issues for themselves during the home loan process," shares Tom Rhodes, CEO of Sente Mortgage.
One of the biggest faux pas, he says, happens to be making large purchases on credit after applying for your loan. "An innocent purchase like pre-emptively buying new furniture for your future home can produce a cascade of unintended consequences that could affect the closing date and other terms of the loan," he says. "It can even cause you to no longer qualify for the loan. Best advice? Shop all you want, but don't buy until the loan is closed."
4. Don't Accept Undocumented Cash Gifts
I learned this the hard way when buying our home. When our realtor informed us that closing was going to cost several thousand more than we had planned for, our backs were up against the wall. My mother offered to loan us the money, which we very gratefully accepted.
There was just one little problem: we had failed to give our lender the head's up. Not only did it hold up the whole process to get sorted out, but we had to get a letter from my mom explaining why she loaned us the money—and then she had to send over her bank statements. In the end, the already-generous loan she gave us wound up being a huge hassle for her and a problem that needed to be solved for us.
5. Don't Rack Up Credit Inquiries
As you set your sights on home ownership, you typically follow a path that leads to your credit being pulled on more than one occasion. For starters, you're going to want to know your credit score. If you notice any issues you need to work on, you're going to want to pull the score again once you've made improvements to see if your score reflects those improvements. And, naturally, a credit inquiry will be made when you get pre-qualified and, subsequently, pre-approved by your lender.
Since it's always a smart move to meet with multiple lenders and compare interest rates, you're looking at multiple pulls. The problem? These inquiries ding your credit report—not significantly, but enough to make lenders sit up and take notice if there are too many.
To avoid raising this particular red flag, Trulia suggested, "Shop lenders within a certain time frame. According to FICO, the time frame should be anywhere from 14 days to 45 days. During that time frame, all inquiries count as just one inquiry, helping you to avoid a huge drop in your credit score."
Re-edited from a post originally published 7.7.2017 - CM