March 9th, 2014 10:55 AM by Bob Rutledge
I see it every month or hear stories from fellow loan officers that before getting our home buyers under contract on the right home can turn even the most stoic shopper into a bit of a dreamer. From paint colors to planting a garden, picturing yourself in that property is critical for many buyers. It is the house and everything about that next new home that all home buyers consider but I ask that you leave a little room for pragmatism. Remember that getting pre-approved for a mortgage is a first step necessity but once you have that pre-approval, even once you are under contract isn’t a guarantee that you will be APPROVED. That prefix attached to approval is there for a reason, a loan pre-approval is not loan approval.
A better name for pre-approval is truly pre-qualification but that term is not welcomed generally by the seller side of the house you want to purchase, so we play the game. Once you are pre-approved, you have found your home and are under contract you will have more hurdles to clear before a lender legally commits to funding your home loan. Buyers who don’t know any better can inadvertently add obstacles to that path or home ownership or even kill the entire application, between contract and closing day.
Some missteps can be costlier than others. Here’s a look at five of the worst things you can do before buying a home.
1. Go Credit-Crazy
It’s almost become cliché in the mortgage industry, but the warning still bears repeating: Don’t buy a truckload of furniture until after your loan closes. The prohibition goes beyond sofas and tables avoid obtaining credit for any major expense, such as a car, a boat or, yes, a new bedroom set.
Be careful with even minor expenses. If you absolutely need to obtain new credit or add debt before closing, talk with your loan officer as soon as possible. We are now required to check your credit report for new debts and increased monthly payments on your credit cards 24 to 48 hours BEFORE you close to insure that your debt to income ratio has not changed enough to wreck your approval.
New payments are going to affect your monthly debt-to-income ratio and not in a good way. Hard inquiries on your credit report could also lower your credit score. That might hurt your interest rate if you haven’t locked or even knock you out of qualifying range all together.
2. Shuffle Dollars and Cents
Lenders will scour your most recent bank statements as part of the pre-approval and approval process. It’s not like they forget about it after that. They will take another look at your assets and bank records again during the underwriting process and possibly afterward you have an approval.
You will need to explain any unusual deposits or withdrawals. Lenders will require clear documentation and a paper trail if you’re putting gift funds toward a down payment or closing costs. Stuffing a wad of undocumented cash into your account is going to raise red flags. By law, The Patriot Act, we are required to source and season all funds used in a mortgage transaction, this can take time, and possibly kill an approval if we cannot use the money that is in your bank account.
3. Get Behind on Bills
Having a late payment hit your credit report before closing can devastate your deal. Payment history comprises about a third of your credit score.
One solitary 30-day late payment can clip 60 to 110 points from your credit score, especially if you have a very light credit history. And 2 recent 30 day lates is almost always a major concern for an Underwriter. If you have low credit scores and anything below 660 is considered low a credit blemish or inquiry could change the outcome of your approval or change your interest rate, but it isn’t always a huge deal if you had an 800 score, right?
Possibly. But if that 30-day late blemish is a mortgage or rent payment, some lenders will deny your application altogether. Many will require at least 12 consecutive months of on-time payments to qualify for a home loan.
4. Co-Sign on a Loan
Co-signing a loan is arguably a bad financial move whenever you make it. But it’s especially risky during the mortgage lending process. It means you’re financially liable for someone else’s debt. I have seen more co-signed notes become the death of a new mortgage application than you would ever think possible, they are family, they are friends, they would never do anything to hurt me.
Yes, that someone else might be the most responsible person on the planet. Lenders will still need to factor that new monthly obligation into your overall affordability profile. Adding one more debt to the list could stretch too thin your debt-to-income ratio and assets.
5. Changes in Employment
Probably goes without saying, but losing your job is going to be a big problem. Even job-hopping can present some major hurdles. Lenders crave stable, reliable income that’s likely to continue.
Lenders are likely to slam on the brakes if you take a new job in a different field or if you decide to start your own business, or even if you get a promotion but see some or all of your income shift to a commission basis.
The bottom line: Any change to your employment is significant. Keep your loan officer in the loop, and ask questions when in doubt. The last thing you want is to waste time and money on a home loan you’re never going to get.
Throughout the mortgage process, it can also be helpful to monitor your credit scores for changes so you can know whether you need to address any problems. To do that, you can use a free tool like Credit.com’s Credit Report Card, which updates your credit scores and an overview of your credit report every month.
You Loan Officer is not your nemesis, just the opposite, I tell my clients that in today’s mortgage world every borrower comes to the Underwriter as guilty. It is my job as your loan officer to act on your behalf to collect all the necessary information and data to prove your innocence. The more I know the better I can represent you and package your loan application in the best light possible. Do Not Doubt for a minute that eventually we will find out everything, best to tell your loan officer everything up front and during the process so there are no last minute surprises. ONLY GOOD SURPRISES ARE ALLOWED AT THE CLOSING TABLE!