For most people, securing a mortgage is an essential part of the homebuying process. That’s how to get the funds to cover the high cost of a home purchase.
Before you apply for a mortgage, there are plenty of things you can do to increase your chances of getting pre-approved/pre-underwritten for a loan.
Borrowers should always do what they can to increase their savings, increase their credit score, decrease their debt, then compare lenders.
But is there anything you shouldn’t do in the months before you apply for a mortgage?
Here are six common pitfalls that we have found can impact your ability to qualify for a mortgage—and how to avoid them.
If you’re ready to buy a home, talk to a Flyhomes Agent who can help you get to where you need to go.
Job or career changes
The pitfall: There are a few reasons changing your job in the months or weeks before you apply for a mortgage might give a loan officer pause.
For one, you might not even have a pay stub yet to prove how much you’ll actually be making.
But, more importantly, lenders look for a good employment track record which provides security to the lender. A good employment track record means it’s less risky to loan a large sum of money.
Switching jobs may be great for you, and it may even be necessary if you need to relocate to afford a home. But, it could read as uncertain or unpredictable to a loan officer.
How to avoid it: If you know you’ll be switching jobs, give it some time before applying for a mortgage. If you have already applied for a mortgage loan, contact your loan officer right away.
If you absolutely can’t wait, if at all possible try to time it so that you close on your home at least two pay cycles after you start your new job. That way, you’ll have the pay stubs at the beginning of your loan application and a longer runway of time at the new office.
Applying for new credit lines or other new loans
The pitfall: Opening new debt while you’re getting a loan will cause you to have to re-qualify, as the lender will have to reevaluate your financials.
Not only could opening a new line of credit or other new loans dramatically slow down the loan process, but your credit score may also drop, or your debt-to-income ratio may increase.
Either of these changes can mean you no longer qualify for your loan.
Remember, applying for a new credit line or a new loan shows up on your credit score as a hard inquiry and affects your credit score.
Plus, a loan officer may wonder why you need more credit if you should already have enough cash to purchase a home.
How to avoid it: Wait until after your mortgage loan closes to open new credit lines or new loans.
Similarly, try to avoid financing large purchases—even if they charge 0% interest for several years, you’re still taking on a new monthly payment.
Mortgage calculator: Estimate your monthly payment
All calculations are estimates and provided for informational purposes only. Actual amounts may vary.
Closing major credit accounts
The pitfall: Your credit score is derived partly from your credit utilization ratio.
Closing an account would impact your overall utilization, and affect the credit score used to qualify and price your loan.
How to avoid it: If you no longer use a credit card and would like to close it, consider keeping it open until after you close your mortgage loan. You can even keep an account open with a $0 balance as long as the creditor allows it.
Large deposits into your bank accounts
The pitfall: All deposits into your bank accounts (generally defined as any deposit that exceeds 50% of your monthly income, but this varies by lender) will need to be documented as being from an acceptable source. This is to verify that the funds you are using for your new home loan are truly yours, not borrowed, and that you are not inflating your assets.
A loan officer would have reason to wonder where the cash all-of-a-sudden came from, especially if your new bank account numbers are way higher than what you started the loan process with.
How to avoid it: If you transfer money, receive a gift, or liquidate assets, hold on to the supporting documentation.
Making major purchases
The pitfall: Whether you finance a major purchase or pay in cash, the change in your bank account, credit usage, or credit report will alert your mortgage loan officer to changes that don’t match the initial paperwork.
A lender begins to wonder if you’re truly responsible with your funds (why buy a brand new car when you’re already buying a home?). If you’re suddenly out thousands of dollars, your interest rate or even qualification could be jeopardized.
How to avoid it: There’s no great way to make a big purchase and apply for a mortgage loan simultaneously.
Cosigning a loan
The pitfall: You want to help your child with student loans or a personal loan for a wedding or a car. That’s what parents do.
But why not wait until you can use your home equity after buying a home? Home equity loans or home equity lines of credit are typically lower interest rates than personal loans, but you must have equity in your new home to do that.
If you cosign a loan for someone else, your credit score may dip.
Your lender will consider that as part of your financial liability unless you already have a history of making payments as the primary borrower or if the loan is almost paid off. If your lender includes the payment obligation on the co-signed loan, that could disqualify you from a mortgage or, at least, spike your interest rate. Beyond that, you’re on the hook for that loan now.
How to avoid it: There’s no way around this. If someone needs a loan and you want to help, you’ll need to accept that this means your mortgage application may now be in jeopardy.
But speak to your loan officer. If they know the circumstances and your finances can handle it, cosigning on a loan for your child doesn’t have to be the end of the road.
When applying for a mortgage, avoid purchases that impact your credit score or debt-to-income ratio
Avoid anything that will drastically change your financial situation, credit score, or debt-to-income ratio in the weeks and months before applying for a mortgage.
That means planning for any purchases, loans, or credit lines you may need in the future and having those things cleared or on record with enough time.
Once you start the process, stay the course: no big purchases, loans, or job changes. Just keep your eye on the prize because your new home, and all its equity, is right around the corner.
Applying for a mortgage is one of the first and most important steps to buying your new home but it can be complicated and slow. Talk to Flyhomes Agent and we’ll help you get financed quicker with the right loan product for you.
Mortgage loan products are offered by Flyhomes Mortgage, LLC a subsidiary of Flyhomes, Inc.
Flyhomes Mortgage, LLC NMLS ID #1733272