Worst Things a Buyer Can Do Before Mortgage Approval
Buying a home is as overwhelming as it is exciting. The process of finding a suitable property and planning the interiors can be fun and exciting. But ensuring the approval of a mortgage involves a lot of work. It all begins with finding a suitable lender, looking at the different mortgage options, and finally applying for a mortgage. The process can become a drag if you don't make the proper arrangements before applying for a loan.
Your finances and credit score will be monitored from the day you apply for a mortgage up until the day you close the loan. If you prevent making any mistakes, you can secure a loan quickly without dragging it out.
Here are some of the common and the worst things buyers do before getting their mortgage approved -
Disrupting the credit score
Your credit score determines whether you are an eligible candidate for securing a loan. It lets a lender know whether you can repay the money and close the loan on time. When you apply for a loan, the lender looks into your credit reports to check for anomalies and ensure a consistent credit report. Closing existing accounts, opening new credit cards, making large purchases, or taking a new loan can jeopardize your chances of getting mortgage approval. A few points here and there might not matter, but if you are on the verge of acquiring a pre-approval at the interest rate quoted initially, even minor changes in a credit report can spell trouble.
Taking new loans
All kinds of loans – student loans, personal loans, or automobile loans increase your total debt load. Lenders will consider your current monthly debt before giving you a pre-approval. Before sanctioning a mortgage approval, they will compare your recurring monthly debts to your monthly income; this is referred to as the debt-to-income ratio (DTI). A financier will not entertain mortgage approval to someone with a greater debt load. As a result, your chances of securing a mortgage for your home will be slim.
Related: What are Mortgage Junk Fees?
In the current economic conditions, DTI plays a significant role in qualifying a person for loan approval. So you should not do anything that would increase your DTI ratio as it will decrease your chances of getting approved. If you have plans for applying for a home loan in the near future, it is necessary to avoid opening new credit lines or taking other loans. Put them off, at least up until you have been approved.
Missing out on bill payments
Be sure to pay all your bills on time. When preparing to buy a property, it is easy to forget about paying bills that might cost you when it comes to securing a mortgage. This also applies to paying your monthly dues for other loans that you may have taken. Make sure to stay up-to-date with all your bills. Missing out on payments, especially loan payments, will make you ineligible for a mortgage from most financiers for at least a year.
Other bills such as car payments and utility bills also hold the same value; failing to clear them is just as detrimental when securing a loan for buying a property. Any bills missed, even months before you apply for a mortgage, can lower your credit score and affect your chances of getting approved. Even if it is not bad enough to deny you a loan, it can for sure delay the process.
Making too many huge transactions and deposits
You should not make any big deposits, withdrawals, or transfers before you reach a closing. As mentioned above, your financial status at the time of loan application influences the approval. By adding or subtracting cash in between will impact the approval decision. Any transaction or deposit above $500 will need an explanation. In case of any significant transactions, you need to need to document its source and submit proof.
Lending companies want to ascertain that you can pay them back; they are very less likely to take any risks. So if you happen to receive a big sum of money, say as a monetary gift, you might want to wait a little longer before you make a deposit. Otherwise, you can request a letter from the gift giver stating that you are not expected to return the money. Every deposit will require authentic documentation.
Spending your entire savings
When using a mortgage loan to purchase a property, you will face a few out-of-pocket expenses. First comes the down payment. Usually, it is somewhere between 3.5% - 10% on the mortgage amount.
Then there are the closing costs; the closing costs are way more than the down payment, sometimes thousands of dollars above it. When lenders check your credit reports, they expect to see enough savings in the account from the past few months. If there aren't sufficient savings, you will be labeled as a high-risk borrower.
Therefore to enhance your chances of getting a quick approval, you should retain a substantial amount of cash in your account for a period. When you plan on buying a home, begin by saving regularly. You need to cut down on additional expenses, put aside the foreign tour, etc. By cutting down these expenses, you will have enough savings in your account at the time of loan application.
Switching careers or taking a long absence from work
Lenders want steadiness – steadiness in your income and steadiness in your employment. You will need to show a stable employment of at least two years. For all lenders, a steady career is a critical factor that decides the approval. But if you receive income from non-employment sources like an annuity, rent, etc., it will not be an issue.
And sometimes people switch careers to end up in a job post with higher pay. And sometimes the job change happens within the same field. For these two cases, you will not face a problem with the lender. But if the career change is drastic and the pay is lower than what you previously received, you will face delayed processing.
More: 9 Home Buying Mistakes to Avoid
So as far as employment is concerned, it is better to maintain steadiness until the closing.
Making a Major Purchase
A big purchase means you lose a significant sum of money. This could be in the form of buying a car or, say, an expensive appliance or taking a vacation. Keep in mind that when purchasing a house, you will also be dealing with several other expenses such as down payments, insurance, closing costs, broker fees, repairs, maintenance, etc. And if you are using your credit card to make the purchase, it will deplete your credit score, which will turn down the lenders.
What are the things you need to do before applying for a mortgage?
We've talked about the worst things a buyer can do before a mortgage is approved. Similarly, there is also a checklist of things you need to do before applying for a mortgage. Here is the list of intelligent choices –
- Until you have closed all your deals related to purchasing the property, stay clear of making any other investments, whether it is personal or on behalf of anyone else. Don't create excess debt and reduce your chances of acquiring a mortgage.
- Limit the usage of your credit card and resist temptations to use it even for small purchases.
- Don't keep any bills pending. Clear them on time because you don't want any negative remarks on your credit report. Even a single missed payment can impact your chances of securing a loan.
- Start saving early. Making it a point to save some money from your monthly income, even if it is a small amount. You might end up needing them to take care of the additional expenses and hidden costs that might show up after you sign the contract. Don't forget that you will be needing money for moving in and for the home makeover
- And keep a steady job. Avoid a job change until you receive the loan. If you are joining a career that pays you more than the current work profile, it will improve your chances of securing a mortgage. Otherwise, it is wise to stick to the current job for a little longer.
Getting a mortgage on a property is becoming challenging as days pass by. New laws and regulations are more stringent and require financiers to look into every aspect of the debtor's financial background before sanctioning a loan. Because many lenders have faced payment delays and substantial losses, they have taken every step to protect their money. Therefore as a borrower, you need to make sure that all your finances are in place and that you are the best candidate for getting a mortgage.
For more assistance on buying a home in Colorado Springs or other areas surrounding our main focus, contact us at any time!