Mortgage Mistakes: What NOT To Do Before Applying for a Mortgage
You often read about what to do before applying for a mortgage to buy a home. However, despite all the attention paid to the housing market and restrictive lending standards over the past few years, it is still quite common for home-buyers to be unaware of what "NOT" to do before, or during their application for a mortgage.
In this post, we'll discuss some of the potentially costly mistakes home buyers make when applying for a mortgage to buy a home.
Don't Change Your Job or Career
It's surprising how often we encounter real estate clients who are considering a career change, or who have recently changed jobs. Yes... it is common for someone to relocate to a new area - and understandably, they may wish to purchase a home. Hopefully in this case, the potential buyer has an ample downpayment, and plenty of savings to boot.
If you're simply transferring to a new community with the same employer, then all other qualification standards being acceptable, you should be okay - though take note, as you may be required to be "on the job" for a pay period or two, so check with your lender - in fact, some of our clients have lived in a hotel for a 2-4 weeks in order to satisfy the lender. However, if you've also changed careers as part of this relocation, you may have difficulty getting a lender to approve you. Lenders want employment stability and favor an applicant staying in the same industry.
So in short, a job change would be scrutinized, and a career change would likely be a BIG mistake!
Don't Apply For New Credit Cards
Too many credit inquiries over a relatively short period of time, are never a good thing for your credit score. Even if you have excellent credit, resist applying for ANY type of credit card 3-6 months before applying for a mortgage - and during the lending process of course. Not only does the inquiry "ding" your credit for a while, but should you be approved, you need to know that the mortgage lender will actually view any unused lines of credit more similar to unsecured "loans." Also, be careful to avoid those tempting and seemingly benign offers at the checkout counter at your favorite department store.
Sure... you'd like to "save 10% today by applying" for that department store credit card. But opening any new credit cards would be a BIG mistake!
Don't Close Major Credit Card Accounts
This causes the most confusion. Logic would indicate that if having lines of credit may be considered a "bad" thing, then it would be smart to close accounts that may not be needed or used. We could write an entire article just on this subject.
To keep things simple... when you close any credit card, you may easily, yet innocently raise your "debt to credit limit ratio" - which can preclude a mortgage approval, or cause you to pay a higher interest rate. When you close an account, you are obviously reducing your available credit. However, if you have balances, your percentage of credit "utilization" is going to increase. This is VERY bad from a lender's perspective.
For example, if you have credit limits totaling $10,000, and balances of $2,000, your ratio is 20%. If you then close an unused credit card with a limit of $6,000, you just raised your ratio to 50% - and that's a bad thing to a mortgage lender.
Moreover, when used responsibly, all major credit card accounts benefit you over time - it demonstrates your ability to repay your debts over time. By closing an older major credit card account, you would be reducing your credit history. Therefore, no matter how much you may detest that credit card company, ALWAYS keep your older accounts open, and use them on occasion.
Closing major credit card accounts is almost always a BIG mistake!
Don't Buy A New Car
It's not too surprising, that folks who have decided it's time to buy a house, may be feeling much better about the economy and their financial health overall. One of the more common purchases in such times is a new car. However, by doing so, you would be increasing your "debt to earnings" ratio - in other words, the total of your monthly debt obligations compared to your pre-tax earnings. While you may very well be able to afford both a new car payment and a new home mortgage payment, you may actually fall below the lender's "debt to earnings" credit standards as a result of the car purchase.
Buying a new car before applying for a mortgage or during the mortgage underwriting process would be a BIG mistake!
Should You Payoff A Car Loan?
Okay... now this may really confuse you!
By paying off a car loan, you are reducing your overall debt obligations. Depending on an applicant's situation, a mortgage lender may recommend reducing auto loan debt obligations in order to increase the amount a home buyer will qualify for (affording a higher house payment). Of course, this assumes the borrower has enough cash-on-hand to pay the outstanding car loan balance without negatively impacting available downpayment funds.
If your mortgage advisor recommends paying off your car loan... then you're advised to follow their expert guidance.
However, it's a fact that a good portion of your credit score is determined by your debt repayment history - including your CURRENT outstanding debts. Unless you are overextended, auto loans often help your credit score. As a result, if you payoff a car loan, your credit score may actually DROP a few points - this is very common.
If you are on the threshold of a particular credit score range and your score drops, you may find that you will be paying a higher interest rate - or worse, you may have just fallen below the lender's standard underwriting guidelines, making your loan more difficult to approve.
Taking that a step further... you may be pre-approved, and without the lender's knowledge, you decide to payoff a car loan or two during the loan underwriting (thinking you're doing the "right thing"). You're then thrown a curve-ball when the lender rechecks your credit a few days before closing. In this case, be prepared for a lot of questions and possible new documentation requirements... or worse, a delayed and/or failed closing.
For these reasons, paying off a car loan could be a BIG mistake! It is crucial to discuss your situation with a trusted mortgage advisor before making a decision.
Don't Make Unusually Large Bank Deposits
This is one of the biggest factors.... all lenders want to see stability, the sources of your income, and all other funds which will support repayment of the home loan. (If you have large sums of cash, and you don't want lenders "in your business" - then consider just buying a home in cash.)
The federal government, banks, and lenders get really nervous when they see large sums of cash being deposited - particularly when it's just prior to applying for a mortgage. The same goes for transferring large sums of money between bank accounts.
Sometimes, such deposits and transfers are completely legitimate. Regardless, this will raise questions, (and you could trigger an IRS audit - but that's another topic). So... if you make large deposits and/or transfers, you need to be prepared and expect to not only answer questions regarding these bank transactions, but you must provide documentation as well.
Making large deposits or transfers without legitimate documentation would be a BIG mistake!
Of course, we're not mortgage lenders... so it's always best to check with a lender well before applying for a mortgage. Just remember... when it comes to mortgage lending, consistency is key.
Prior to, and during the home loan underwriting process, unless specifically advised by your lending consultant, do not make any major changes in how you handle your finances. You may think you're helping, but you could be making a BIG mortgage mistake!