When applying for a home loan, there are several major factors that the bank or lender’s underwriters will look at. Their stamp of approval can make the difference between closing your loan with a great low interest rate on the house you love, or delays, roadblocks, obstacles, and possibly even blowing up the whole real estate transaction!
We’ve talked about it before, with 20 things NOT to do when applying for a home loan.
While there is some overlap, today we’ll discuss just things that you shouldn’t do in advance of the home buying and mortgage process.
How long should you adhere to the standards of credit and debt temperance before you come to me and we fill out your loan application? Of course, every situation and borrower is different, but it’s a good idea to start minding your credit and finances nine months or so before you anticipate applying for a home loan to purchase a house, and definitely within six months or less.
We definitely don’t want that, so you’ll want to start paying attention to the major factors that go into a home loan, which are:
1. Your monthly income
2. Your debt obligations every month
3. Your credit score and history
4. The amount in your bank account
5. The amount you have to use as a down payment on your home purchase
So, here are some best practices for things NOT to do in advance of getting a home loan:
1. Max out credit cards
Once you run up your credit card balances to their limit (or close to it), two things will happen: your credit score will most likely fall, since about 30% of your score is based on your Credit Utilization rate, and your monthly payments will go way up. Both of those things can severely hurt your chances of getting a loan approval!
2. Open new tradelines
When you open new credit accounts, it could potentially throw your Credit Utilization out of whack, and further lower your score if it’s not a quality tradeline. Furthermore, just the process of applying for too many accounts (soft or hard credit inquiries) can be a red flag to the credit bureaus.
3. Close an old account
Payment history is a major consideration when calculating your credit score, but so is the length of time your accounts have been open. If you pay off an account to zero and then close it, you may actually hurt your score because you changed your Utilization drastically but also erased a seasoned, positive track record of making payments on time.
4. Pay off a collection
The same as above goes for collections. While it may seem like common sense and responsible to pay off an account in collections, it may actually trigger re-reporting of the negative blemish as recent and therefore sink your score. Talk to me before you do anything drastic like this!
5. Add any monthly debt obligations
So much of qualifying for a mortgage comes down to fitting within the bank’s ratio of debt-to-income, which will include the new proposed mortgage payment (as well as taxes, insurance, etc.). Therefore, when you add anything at all that shows up on your credit report as a monthly obligation, you jeopardize that precious Debt to Income Ratio.
6. Get an auto loan
Auto loans usually don’t do your credit score any favors, and you’ll be tacking on a monthly payment of $200, $400, or even $700 to your Debt to Income Ratio, which can really make it harder to qualify for a mortgage loan. Just wait!
7. Go late on any payments!
Of course, it’s worth mentioning that you should never miss a payment on any loan or debt. Even if it wasn’t your fault, like if your check got lost in the mail or the credit card company didn’t process the payment on time,
8. Fail to monitor your credit
The scary thing is that even if you do everything right, your credit, debt levels, and finances could STILL get ruined right before you apply for a home loan! That’s because data theft, ID fraud, and financial hacking are on the rise, with about 1 in 4 Americans affected every year and a big mess that ensues. To prevent that from happening, monitor your credit score every four months at the very least, and you can even place authorizations and other safeguards on your credit.
9. Be very careful about protecting your data
For the same reason listed above, be cautious with your financial data and sensitive documents before applying for a mortgage, from what you shred, how you throw things out, your passwords, and more.
10. Move money or deplete savings
We mentioned that the bank will look for cash in reserves and also the money needed for a down payment, but if you start withdrawing or even depositing large chunks of money that can’t be accounted for, or making big purchases that deplete your savings and checking, it could raise a red flag with your mortgage loan underwriter.
11. Change jobs (or career)
Even if you consider your new job change an advancement or at least a lateral move salary-wise, mortgage loan underwriters look for stability when combing through a borrower’s application, and ideally like two years on the same job. If you must change jobs, try to at least keep within the same industry or else it may look too rocky for an underwriter’s liking.
12. Not declare income on taxes
OF COURSE, none of you would ever fudge on your taxes (wink), but I’ve heard that self-employed, commissioned, and other people in sale-related industries that receive 1099s sometimes get creative with the numbers in order to pay less to Uncle Sam. It’s hard enough getting a mortgage loan approved for these borrowers, so you definitely will need to show all of your income on your tax returns if you need it to qualify for your new house purchase.