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. Even if you plan to make a cash offer, it’s a good idea to finance your offer through a company like Flyhomes so you can build equity.
Before you apply for a mortgage, there are plenty of things you can do to increase your chances of getting pre-approved or even 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. But remember, there are always options. If you’re ready to buy a home, talk to a Flyhomes Mortgage officer 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 employment security in a borrower because that means it’s less risky to loan a large sum of money. Switching jobs may be great for you, personally, 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 you apply for a mortgage. But if you absolutely can’t wait, 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
The pitfall: Opening new debt while you’re in the process of 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 dramatically slow down the loan process, your credit score may 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 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 loan closes to open new credit lines. 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.
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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 which shifts your debt-to-income ratio and could potentially impact 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 loan. You can even keep an account open with a $0 balance.
Large deposits into your bank accounts
The pitfall: All deposits into your bank accounts that exceed 50% of your monthly income will need to be documented as being from an acceptable source. This is to verify that the funds you are using are truly yours 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, be sure to 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 loan officer to changes that don’t match the initial paperwork. Not only will a lender begin to wonder if you’re truly responsible with your funds (why buy a brand new car when you’re already buying a home?), but 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 at the same time. But if there are extenuating circumstances like your car being totaled and you need to buy a new one, consider renting a car for a while instead. If that won’t work, most lenders offer a rate-lock period once a loan is approved so hold out on any major purchases until then.
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 noble. But why not wait until you can use your (much cheaper) home equity after you’ve bought a home? If you cosign a loan for someone else, your credit score will dip. Beyond that, you’re on the hook for that loan, now, and your lender will consider that as part of your financial liability. That could disqualify you from a mortgage altogether or, at least, spike your interest rate.
How to avoid it: There’s no way around this, really. If someone needs a loan and you want to help, you’ll need to accept that this means your mortgage is now in jeopardy. But speak to your loan officer. If they know the circumstances and your finances can handle it, cosigning on your child’s student loan doesn’t have to be the end of the road.
What to avoid when applying for a mortgage
In the weeks and months before applying for a mortgage, avoid anything that will drastically change your financial situation, credit score, or debt-to-income ratio. That means planning ahead 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.