What Not To Do When Applying For A Home Loan

If you are in the market for a home, then surely, you have done your research on everything that you need to do to be prepared.  However, there are common mistakes that you may not be aware of that may cost you the dream of homeownership. 

Getting pre-approval does not mean that the lender cannot back down from approving your loan hence the word pre.  Here are some common mistakes that could end up hurting you.

  • Do not let anyone make inquiries into your credit.
  • Do not switch/start a new job.
  • Avoid large purchases.
  • Avoid making large deposits into your bank account.
  • Don’t start banking at a new institution.
  • Keep the down payment in your account for at least two months.
  • Say no to family and friends.

Do not let anyone make inquiries into your credit.

The first thing that a lender will look at is your credit history.  Shopping for a home loan involves inquires to your credit, according to MyFICO- “FICO scores are more predictive when they treat loans that commonly involve rate-shopping, such as a mortgage, auto, and student loans, differently. For these types of loans, FICO Scores ignore inquiries made in the 30 days before scoring. So, if you find a loan within 30 days, the inquiries won’t affect your scores while you rate shop.”  Having your credit checked by multiple lenders does not affect your credit score all that much.

The thing that will affect your credit score, and that you do you want to avoid is applying for credit cards, or any services such as cell phone, or cable companies that will probably make a credit inquiry.  When the mortgage company sees inquiries are made, they assume that you are trying to take out new debt.  

Monitor your credit closely and make sure not to add any new credit inquires to prevent any surprises that could delay your home loan application process.

Do not switch/start a new job.

Along with your credit and income, your employment history is a factor that lenders look at when evaluating a mortgage application.  Lenders look for steady job history and no gaps in employment. So, while a new job and more money may be a good career move, it may affect how lenders forecast your future income as they prefer that you have steady, predictable paychecks.

If you are making a lateral move such as a promotion or moving from a commission to an hourly job with equal or more compensation, let your lender know as soon as possible also, be prepared to show extra documentation.

Do not quit your job.  Many lenders verify employment up until your actual closing date.  If your lender cannot verify employment, the loan underwriter will automatically deny your loan.

Avoid large purchases.

Avoiding large purchases is pretty self-explanatory.  Even if you are already pre-approved, lenders do not stop monitoring your credit.  Therefore, avoid taking on large amounts of new debt.  It is not advisable to buy a car or open a line of credit to purchase furniture for your new home before you close on your property.

Keeping your debts to a minimum will help make the home-buying process go smoothly.

Avoid making large deposits into your bank account.

When you make a significant deposit or do unusual things with your finances, the lender may scrutinize the loan and possibly back out.  For example, if a large sum of money suddenly appears in your bank account, it can be a red flag for the lender.  There may be situations such as a deceased family member leaving you an inheritance or winning a lawsuit or even the lottery. These are situations that you have to be prepared to explain and show proof.   

Katy, a bartender from Chicago, is in the market for a new home.  She gets paid in cash every day.  Katy was making large cash deposits into her bank once a month because it was easier for her to go to the bank one time instead of every day.  When her lender looked at her bank statements, they questioned the large deposits.  Katy had to ask her employer for timecards that proved what she claimed that she made every day. She then had to write a letter to the lender explaining her situation.  Katy stated that had she known that her lender would question her large deposits, she would have made deposits every day- an excellent tip for people who get paid in cash.

Don’t start banking at a new institution.

Your bank may have made you angry or upset. Or maybe you saw a great offer from a competing bank that you cannot pass up. Well, you do need to pass it up, because changing banks before getting your loan can disrupt everything.  Your banking history and status are part of the equation that leads to you getting pre-approved.  Your lender may think that you are hiding something while switching banks during the loan process.   

Do not shift your finances around. When a lender pre-approves you, the approval is based on the current state of your finances-maintain that state.  If you make the mistake of switching finances around, be prepared to give the lender a detailed account of why you moved your money. This will stall the loan process and can even cost you money as you risk delaying the process and losing the lock on your interest rate.  Therefore, keep your money in one place until closing.

Keep the down payment in your account for at least two months.

A simple mistake, such as moving your money from a savings account to a checking account before closing, can raise a red flag.  Lenders prefer for you to have the money that is going towards your down payment in the same account for at least two months. They call these two months “seasoning,” When looking at your spending habits, the lenders consider seasoning a demonstration of stability and your ability to cover the loan payments. 

Do not make the mistake of spending your down payment money thinking that you will replace it with the next paycheck.  The goal is to act as if this money is not available because technically, it is not.

Say no to family and friends.

Perhaps, you are one of those people who are always willing to lend a hand, that’s great! But this is not the time to start doing favors for friends and family by letting them borrow money, or being a co-signer for a loan.  These things will affect how the lenders view your spending habits, and once again, they will ask you to explain the situation.

During the loan process, there is no reason to take unnecessary risks with your finances when you are so close to buying your home.  If you remember to monitor your credit report, be cautious when making a large purchase and opening new lines of credit.  Keep your spending habits at bay, and the loan process should be a smooth process that will ensure that your dream of homeownership becomes a reality.