You’ve been diligently saving, found the home of your dreams, and are ready to seal the deal by applying for a mortgage. High five! When you’re this close to the finish line, it’s important not to grow complacent and lose sight of the end goal—that means avoiding any hurdles that could trip you up and set you back several steps!
Here are some key missteps to avoid if you want to maximize your chances of securing a mortgage and the best rate possible for you:
Applying for new credit
One of the main factors that mortgage lenders evaluate when determining your loan eligibility and terms is your debt-to-income ratio. Increasing your debt load during the mortgage process may jeopardize your loan and turn your approval into a denial. Our advice - wait before applying for any new credit.
You should also bear in mind that opening new credit has a higher impact on your credit than inquiries. So by applying for financing for a fancy new sofa, you increase your debt load, decrease your credit by borrowing more, and put a new inquiry on your credit score! Take our advice and wait until you are clear to close on a mortgage before buying up all that fancy new furniture.
Dipping into your savings
Even if you’ve budgeted carefully and have enough cash on hand for a down payment and closing costs, now’s not the time to raid your savings account for other unnecessary purchases. After all, mortgage lenders view your savings as a safety net of sorts. What would happen if you or your partner suffered a temporary decline in monthly income? Lenders are heartened to see that you have a financial cushion to weather these types of financial storms, and are subsequently more likely to approve borrowers with a decent chunk of cash in their accounts.
Transferring your money from account to account
When you apply for a mortgage, lenders look to get a full picture of your financial situation, and inconsistent, unexplained appearances of money can be a red flag. Individuals often move money from one bank account to another for convenience’s sake, but it can create headaches when they have to explain each transaction to a circumspect underwriter. If you do need to move money around, be sure to maintain a paper trail that clearly demonstrates the origin of each deposit and transfer.
And remember, if you’re planning on accepting a gift from a friend or family member, you’ll need to produce a co-signed letter that explains your relationship to the gifter and provides confirmation that there is no expectation of repayment. Crucially, the gift cannot be in cash and must be a check or wire.
Making late payments
Missed payments can significantly impact your qualification for a mortgage, so you should do your utmost to avoid them. When buying a home, lenders will evaluate your performance with smaller debts as a representation of your ability to handle a bigger debt. Set payment reminders or auto-payment to avoid late payments.
If you’re having trouble making your payments on time, you should let your lenders know as soon as possible, as they may be willing to work with you to figure out an agreement that causes minimal damage to your credit score. That said, if you’re struggling to meet your existing obligations in a timely manner, you should probably walk away from the home purchase process and focus on managing your bills.
Closing any credit accounts
Remember when you first started building your credit, and you had that card with the astronomically high interest rate and a pitiful credit limit? Chances are you’re no longer using that card, so it might be tempting to say sayonara and close that chapter of your life. But wait—not so fast!
By closing the account, you are reducing the amount of available credit that shows on your credit report – and thus, any balance held on other cards will manifest as a larger percentage of overall credit utilization. In tandem, the closure of this account may cause the average age of your credit lines to plummet. Both factors can ding your credit score, meaning you no longer qualify for a favorable mortgage rate. So, your best bet is generally to keep all accounts open until after you’ve landed a decent mortgage rate, and then reassess.
Making major life changes
You might be giddy with the prospect of a new home and feel it’s time for change in other areas of your life, too, but hang tight on that new job or business venture for now. Lenders are keen to see that you have a steady financial trajectory: slow and steady does it! Buying a new home is a huge and exciting milestone, so it’s best to hold off on other life changes until after you’ve qualified for the optimal mortgage rates and terms. This isn’t a long process—especially when using Simplist!
If you’re looking for further advice on your particular situation, schedule a call with one of our licensed loan experts, who will work with you from before you submit your application through your closing.