The home loan process can be stressful – with many steps that need to be taken. Something that may seem inconsequential to you could have an impact on your mortgage approval, and the last thing anyone wants is to have their dream to fall apart because of a simple misstep!
The following list of mortgage DON’Ts can help you avoid the mistakes many borrowers make and ensure a smoother loan process.
Mortgage Don’ts During Your Loan Process:
1. DON’T: Quit or Change Your Job
While changing jobs may not prevent you from getting a mortgage, it could delay your home purchase or refinance. Your credit approval is based on your current job history and income, so making a change – even if it is moving to a higher-paying job – could change your ability to qualify for your new home.
If you expect to change jobs during the loan process, tell your lender upfront so they can work with you on meeting the requirements.
2. DON’T: Make Any Major Purchases
Making major purchases such as a new car, furniture or appliances, will increase your debt and may impact the amount you’re qualified to borrow and may even affect your ability to get a loan.
This includes deferred payment plans that are a popular option when purchasing furniture. Even if the payments are delayed 6-12 months down the road, they will still show up on your credit report as debt.
3. DON’T: Apply for New Credit
You lose points from your credit score every time that your credit is pulled by a potential creditor or lender. Depending on your current credit report and the type of inquiry, you could lose anywhere from 2-50 points each time. This includes credit cards, student loans or any other lines of credit.
4. DON’T: Make Late Payments on Your Mortgage or Other Accounts
Payment history accounts for 35% of your credit score, and takes into account whether you’ve make your payments on time. Late payments are evaluated based on how recent the late is, the severity of it, and the frequently of the late payment(s).
In general, the longer a bill goes unpaid, the more damaging it is to your credit score. A 90-day late can have a more significant impact that on 30 day late. Additionally, the more recent that late payment is, the more damaging it will be.
Late payments may also have a more significant impact on a higher credit score. For example, a 30-day late could cause as much as 90-110 point drop on a FICO score of 780 for someone who’s never missed a payment on any credit account.
5. DON’T: Make Large Deposits Into Your Checking or Savings Accounts
Any time you make a large deposit (typically anything over 20% of your gross monthly income), it will need to be verified and will require a letter of explanation that sources the funds. Transferring large balances in-between your accounts also needs to be tracked and verified. Listen to our educational video to learn more.
6. DON’T: Max Out or Over-Charge Your Credit Cards
Cards with a high credit utilization ratio, like high balances or maxed out cards, can lower your credit score. Keeping your credit card utilization low, preferably under 30%, is a good goal to aim for.
7. DON’T: Write Non-sufficient Funds Checks
During the loan process your lender will request 2 months of bank statements as documentation. Bank statements showing issues with overdrafts may indicate to the lender that a borrow has an insufficient income or inability to manage money and result in a declined mortgage application.
8. DON’T: Co-Sign For Another Person For a Loan or Line of Credit
Even though the loan is for someone else, by co-signing you’re assuming the debt as well, impacting your debt-to-income ratio and credit score.
9. DON’T: Close Credit Card Accounts
Even if they have a $0 balance. When you close a credit card account it will appear to the FICO scoring model that you debt ratio has gone up. It can also affect other factors in the score such as length of credit history.
If you have to close a credit card account, wait until you’re finished with the loan process and make sure it is a more recent account.
10. DON’T: Pay Off Collections or Loans
Paying collections may decrease your credit score immediately due to the date of last activity becoming recent. Disputing credit trade lines or collections reporting on your credit report can have a similar impact. If you want to do any of the above, it’s best to discuss your options and their impact with your lender.
Don’t Change Anything
It’s probably becoming clear that the best rule is “Don’t Change Anything!” just before or during your loan process. While some of these moves may seem like a great idea, they often can have negative consequences…so talk to your lender before making any changes!