If you’ve been pre-approved for a mortgage, you’re probably assuming you can breathe easy and focus on finding the home of your dreams without needing to worry about the loan any further. Unfortunately, that’s not the way it works. There is a huge difference between being pre-approved for a mortgage and being approved for a loan. When a lender gives you a pre-approval letter it basically says the lender thinks you have a great chance at being approved for a loan, but it doesn’t guarantee it. Once you go under contract, you’ll need to fill out a lot more forms, go through underwriting where the underwriter will scrutinize every document and ask for additional supporting documents, have your credit report pulled again, etc. Only then will you find out if you are fully approved for the loan.
Between now and the time you close on a home, it’s important to keep your finances in the same condition (or better) than they were when you applied for your pre-approval letter. Unfortunately, buyers often do things that can potentially jeopardize being approved for a loan. So between now and when you close on a home here’s my DO NOT DO list for you:
Don’t spend your savings – you need cash to pay your down payment and the closing costs on the day of closing. Your lender may verify your cash reserves more than once between now and closing, so make sure you don’t deplete your cash reserves at all. This means you can’t buy new appliances, furniture, expensive gifts, etc. until after closing. If you do, it could put your loan in jeopardy.
Don’t change your jobs – if you can help it, that is. Don’t quit or change your job if you can help it. A job change can mean a raise but it can also delay your closing date as your lender will verify your employment before your closing date. If you are no longer employed there, the lender will stop the loan from funding and will usually require two pay stubs from your new job before you are allowed to close.
Don’t skip or fall behind on payments – one of the most important elements of your credit score is your history of on-time, in-full payments. Lenders generally pull your credit one more time the day before closing so make sure you are caught up on all payments.
Don’t move money around – your lender will ask you for your most recent bank statements during the underwriting process. If something unusual comes up such as an account with a $0 balance which previously had $20,000 in it, the lender will require a paper trail to see where that money went. Therefore, if you want to consolidate funds into different accounts it’s best to do so before you get pre-approved.
Don’t close any lines of credit – closing credit accounts can significantly impact your credit score. You lose points when you have a higher usage of debt compared to your overall credit availability. If you do decide to close any lines of credit, wait until closing is complete. This warning might sound silly, but it’s one of the most common reasons for people being denied their loan.
Don’t apply for new credit – like closing a line of credit, applying for new a credit card or loan will also impact your credit score. You lose a few points with every credit inquiry. If your lender sees that you’ve opened a new credit card, he or she may also worry you’ll spend the maximum loan amount on that credit card then default on your mortgage payment.
Don’t co-sign on a loan – this is an absolute no-no. When you co-sign on a loan it means you’re now financially liable for someone else’s debt. Lenders will factor that new monthly obligation into your overall affordability profile. Adding one debt to the list could stretch your deb-to-income ration and assets too thin.
Don’t fail to communicate quickly with your lender – be the first to inform your lender on any financial or employment changes during the transaction. Changes can wreak havoc with closing dates.
Don’t leave town if you can help it – Going out of town and putting expensive airline tickets, hotel reservations, car rentals, etc on your credit card can put your loan in jeopardy as it can change your credit card debt ratio. In addition, once you’ve gone under contract your mortgage lender will need a ton of paperwork from you and often needs it quickly. If you’re out of town, you may not have access to the paperwork he or she needs. If you do need to go out of town, talk with your mortgage lender first to find out what credit cards s/he wants you to charge expenses to as well as if there is any paperwork s/he needs you to fill out before you leave.
Don’t get divorced – don’t file for divorce. When that happens, most lenders will not make a mortgage loan until the final decree, showing how the assets from your marriage, are being divided which can take months.
Questions? Contact me at email@example.com or 717.963.0016.