The time between applying for a mortgage and closing on it is an important one. Thousands of borrowers derail their mortgage approval by making innocent mistakes during the underwriting process.
Here are the top 8 ways you can ruin your mortgage approval without realizing it.
Take out a New Loan
A new car loan or personal loan may not seem like a big deal to you right now, but it’s a big deal to underwriters.
A new loan affects your credit score and your debt-to-income ratio. New loans drop your credit score because they lower your credit’s average age and add an inquiry to your credit report. But the biggest problem is the debt-to-income ratio.
Let’s say you applied for a loan that allows a maximum 43% debt-to-income ratio and you had a 42% debt ratio when you applied. The new loan could put your DTI over the limit which would ruin your approval.
Miss Credit Card or Loan Payments
Your payment history is the largest part of your credit score. Any payments you make over 30 days late hurts your credit score considerably. This includes credit card and loan payments.
Your credit score has five components, but your payment history makes up 35% of it. Even one 30-day late payment can hurt your credit score, but any payments made even later than 30 days after the due date will do more damage, putting your loan approval at risk.
Change Jobs (or Leave your Job)
Sometimes losing your job is outside of your control, but if you can help it – don’t change jobs while you’re in the middle of a mortgage application.
Even if you think it’s ‘okay’ because you’re staying in the same industry or you’re getting paid more, hold off until you talk to your loan officer or better yet until you’ve closed on your loan.
Borrowers often think once they are pre-approved they can do what they want with their job, even leave it, but that’s not the case. Lenders verify your employment one more time before you close on your loan if you left your job, you might not have a loan.
Move Money Around
Moving money around may seem innocent enough, but it throws up a red flag for underwriters. Here’s why.
Underwriters ask for the last 2 months of bank statements to ensure the money in your account belongs to you. If there are any large deposits, they must be sourced to prove they aren’t a loan.
If you use money from another account to pay your down payment or closing costs, underwriters can’t accept it. They can only accept funds from bank accounts they verified. Even moving money around to other accounts can throw up a red flag.
Instead, keep the money in your bank account that you already verified there. This way there’s no reason to verify any other bank accounts and possibly stumble across unverified large deposits.
Apply for New Credit Cards
If you’re like most people, you get bombarded with credit card offers but that doesn’t mean you should take them. This is especially important when you’re in the middle of a mortgage application.
Even applying for a new credit card can hurt your credit. It also throws up a red flag to underwriters who need more evidence that you didn’t charge anything as that would affect your debt-to-income ratio too.
Make a Large Purchase
Buying a new house is exciting and it usually means buying new furniture, appliances, and other items for your house, but hold off until you close on your loan.
Even if you pay cash for the items, you could ruin your approval. What if you dig into the money you had set aside for your down payment and closing costs? Even if you don’t touch that money but you eat into your reserves, it could cause you to lose your approval.
If you charge the purchases, it affects your debt-to-income ratio and credit score making it even harder to keep your approval.
List an Investment Property for Sale
Some people have investment properties and they use the income to qualify for a loan. If you list the house for sale, though, you are eliminating that source of income which can affect your debt-to-income ratio.
Putting a house on the market is a red flag and is an automatic 3-month stay on your mortgage application. Not only would you not be able to close, but you’d have to start the underwriting process all over again too.
It sounds like a good thing to pay off collections, right? But when you’re in the middle of a mortgage application, it’s the worst thing you can do.
If you were approved with the collection on your credit report, leave it. If you do anything to the collection, including talking to the collection agency, it reactivates the debt on your credit report which can damage your credit score.
It’s good to have a plan to satisfy your collections but do that after you close on the loan unless your loan officer tells you that you must satisfy it to be able to close on the loan.
The best way to handle your finances when you’re in the middle of a mortgage application is to do nothing. Keep everything as status quo as possible.
If you make any changes, even minor ones, it could delay your mortgage process or even cause an underwriter to decline it. Think of it like taking a snapshot of your financial situation and keeping it that way. It’s only for the time being – usually 30 – 60 days, but it can be one of the best ways to ensure you don’t lose your mortgage approval days before you’re set to close on your home.