When you are ready to buy a home, you have a lot of decisions to make. You also have a lot of work to do. Lenders will evaluate your finances inside and out to make sure that you are a good candidate. Because of this, you must be on your best ‘financial behavior.’ It’s best if you freeze your financial life as it is until you get through the loan closing.
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Just what does that mean? Keep reading to learn the dos and don’ts of the mortgage approval process.
Do Keep the Same Job
No matter how bad things get or how good of an offer you get from another job, wait. When you are in the middle of the mortgage process, lenders evaluate your income and verify your employment. Your income determines your debt ratio, which determines your eligibility for a loan program as well as how much you can borrow. Lenders usually want at least a 12-month history at the same job.
If you change jobs in the midst of the loan process, it’s like starting over from scratch. Lenders have to wait until you have a decent history of receiving the income (thirty days would be the absolute minimum but many require as much as 6-12 months). They need to reevaluate your debt ratio, determine how much loan you can afford and confirm your employment. In other words, changing jobs could delay your loan indefinitely.
Do Keep Making Your Loan and Credit Card Payments
Just because a lender pulls your credit when you first apply for the loan doesn’t mean they don’t pull it again. Don’t get lazy while you are in the middle of the loan process. Make all of your loan and credit card payments on time.
Lenders usually pull credit during the pre-approval process and then again at some point before the closing. They do this to make sure nothing drastic has changed since they approved you for the loan. If they pull your credit and find that you have late payments, it could alter your loan approval. They based your loan approval on your original credit history. If there weren’t any late payments then, you shouldn’t have any now. It could throw up a red flag and cause the lender to pull their approval.
Do Stay in Contact With Your Lender
It’s important to have open lines of communication with your lender during the mortgage approval process. Just because you received a pre-approval doesn’t mean your job is done. As the underwriter goes through your file with a fine-toothed comb, he/she may need further clarification on certain things. You may need to provide more documents or to answer questions. The easier you are to get a hold of and the quicker you respond, the more likely you are to get the approval you need in a timely manner.
If you haven’t heard from your loan officer in a few days, it doesn’t hurt to call him/her. Ask about the status of your loan and if there’s anything you need to provide. If you do have to get more documents for them, do so in a timely manner so that the underwriter can keep up the pace in underwriting your loan.
Don’t Make Any Large Purchases
We know moving into a new home means buying a lot of new things. Wait until after you move into the home to buy them, though. We are talking about large purchases, like appliances and furniture. We are also talking about non-home related items, like a new car. Any purchase that would show up on your credit report as a debt, such as a new installment loan or a new credit card purchase should be delayed.
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Any new purchases increase your debt. This means you have a higher debt ratio and you could lose your loan approval. At the very least, it forces the underwriter to reevaluate your loan, which could mean a delay in your closing.
Note, that even small purchases on a credit card could ruin your approval. If you make many small purchases, they can add up. If you end up near the limit of your credit card, it brings your credit score down and increases your debt ratio, both of which can cause you to lose your loan approval.
Don’t Apply for New Credit
Just as we said above, you have to freeze your credit as it is now. This means don’t apply for new credit. If you do, this will force the underwriter to go back and evaluate your loan again. This could affect your debt ratio and even your credit score.
You might have a lower credit score that could make you fall below the threshold for the loan program. You might have had a debt ratio that was close to the maximum allowed and this new credit was enough to put you right over the edge.
If you need to apply for new credit, do so after you close on your loan. It won’t affect anything at that point. If you do it beforehand, though, you risk your loan approval.
Don’t Make Any Changes to Your Current Credit
Here’s the thing – lenders approve you based on what they see now. If you have an approval, you should leave everything on your credit report as is. This may sound strange, especially if you have collections or large credit card balances, but making changes could alter your credit and your approval in a way that you won’t like.
Before you pay off a collection, consolidate debt, or close a credit card, talk to your lender. Chances are they will tell you to leave everything as is because of the risk of a changing credit score. Don’t assume you are doing yourself a favor by making your credit ‘better.’ Instead, talk to the lender and see what they say. If they say leave it, then do as they say.
Don’t Make Large Deposits in Your Bank Account
If you are paying your own closing costs or making a down payment with your own funds, your bank account needs to be as transparent as possible. Make sure that any deposits that you make can be traced. The most common deposit comes from your employment income. Your lender can trace those deposits to your pay stubs; that is usually just fine.
What isn’t fine is if you make a large deposit that doesn’t coincide with your income. If you don’t have any paperwork to show where the deposit came from, it could throw up a red flag. You need the proof of the sale of an asset or even a gift letter stating that a relative gave you a gift. Your lender can tell you what proof they require for any large deposits, but just know you need some type of proof. If you don’t have it, the lender will assume you have a new loan and it could put your loan approval at risk.
The bottom line is that you shouldn’t change anything about your finances after you secure a loan pre-approval. Leave everything as is from your job to your bank account and your credit cards. Any major changes have the ability to make you lose your loan approval. That’s the last thing you want. Once you close on that loan, you are free to do as you see fit. Until that point, leave well enough alone.
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