Once you start the mortgage approval process, you have to ‘freeze’ your financial life. In other words, you don’t want anything to change. Even the smallest change can cause issues for you, as it can be a red flag for a lender. Basically, the lender takes a snapshot of your financial life and it’s up to you to keep it that way at least until you close on the loan.
While you are able to spend money and go about your daily life, there are certain things you should not do during this time. Keep reading to learn the things you should avoid.
Do Not Apply for New Credit
When you talked about ‘freezing’ your financial life, we were really talking about your credit. Your lender pulls your credit report at the start of the process, but that’s not the end. They will pull it again, typically closer to the closing date. They want to know that your credit is about the same as it was when you applied for the loan.
If you applied for new credit during that time, it alters everything. You now have larger debts, less disposable income, and might not qualify for the loan. So not only does the new credit affect your credit score, it trickles down the line making the lender start back at square one to see if you qualify.
Do Not Make Large Purchases
Large purchases are another red flag for lenders. Whether you pay cash for the new furniture or you finance it, your mortgage approval may be on the line. While lenders do look at your credit and debt ratio, they also look at your assets. Some loan programs require a specific amount of reserves on hand (liquid assets). Some borrowers use their liquid assets as compensating factors. If you drain that account by making a large purchase, it can alter your loan approval.
No matter how much you think you can afford the purchase, especially if it includes a monthly payment rather than a large lump sum. While you might think spreading the payments out is a good idea, it eats into your income, which increases your debt ratio. This could hurt your chances of mortgage approval.
Do Not Pay Your Bills Late
Going back to your credit score, lenders are looking at the history too. When they pull your credit for the second time, they will look carefully at your trade lines. If you missed a payment on a bill, not only will your credit score drop, but your reliability will be compromised in the eyes of the lender.
If you do miss a bill, make sure you don’t let it go more than 30 days late. This is the point that the credit bureaus find out about the late payment and report it.
Do not Close Your Credit Cards
Even if you don’t want a credit card any longer, keep it open. You can lock the card up and not use it, but keeping the account open will help your credit score and possibly your utilization ratio. If you close the account, you lower your credit’s average age, which can damage your credit score.
If you have outstanding revolving debt, you increase your credit utilization rate, which also damages your credit score. Keeping the card open, but unused helps your utilization rate stay lower, which will help your case when applying for a mortgage.
Don’t Quit Your Job
When the lender verifies your income, they also verify your employment. Some loan programs/lenders require that you have the same job for at least 2 years. Even if they allow a shorter period of employment, they want you to keep the same job that they verified.
If you quit your job, even if you have another one lined up, lenders view this as risky. There isn’t a history to show the consistency of the employment. The lender also does not know the certainty of the job remaining stable for the near future. Keeping the same job at least until you close on the loan is the best way to keep your approval. Once you close on the loan, you are free to change jobs as you see fit.
Don’t Hide Your Money
Lenders like paper trails when it comes to your money. In other words, you can’t pull your 20% down payment out from underneath your mattress and expect to use it. Lenders need to see ‘seasoned funds.’ This is money that sat in your bank account for at least a few months. Each loan program/lender has different requirements regarding how long the money must sit there.
Make sure you deposit your money in the same account that you will use to pay the down payment and closing costs. If the money comes from anything but your income, make sure you keep a paper trail. For example, if you sell an asset, keep the proof of the sale and the deposit ticket for proof of the funds. If you accept a gift, which many loan programs allow, make sure you keep a copy of the check written as well as the proof of deposit.
In short, be as transparent as you can with your money to let the lender see what you do with it.
While you wait for your mortgage approval to be finalized, it’s important to keep everything as it was when you applied for the loan. Even the smallest changes can put your loan approval at risk. Always stay in communication with your lender and talk about any changes you might make to see how it would affect your loan approval.
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