Some of the biggest mortgage problems happen before a homebuyer ever applies for a loan. A change that seems perfectly reasonable at the time—buying a new car, changing jobs, becoming self-employed or moving money between accounts—can sometimes make it harder to qualify for a mortgage.
And the risk does not end once you are pre-approved. Your income, employment, credit, debts and assets may continue to be reviewed throughout the mortgage process and before closing.
If buying a home is on your radar, one of the best rules to follow is simple: before making a significant financial or employment change, talk to your loan officer.
Don’t Take On a Large Car Payment Before Buying a Home
This is one of the most common examples of accidental mortgage sabotage.
You may comfortably afford a new car in your everyday budget, but mortgage qualification is based in part on your debt-to-income ratio. A substantial new car payment can reduce the mortgage payment—and therefore the home price—for which you qualify.
In some cases, taking on a large new monthly payment shortly before applying for a mortgage can mean the difference between qualifying and not qualifying.
If you are thinking about buying a home, find out how a proposed car loan or other major debt could affect your mortgage qualification before signing for it.
Be Careful About Changing Jobs or Becoming Self-Employed
Changing jobs does not automatically prevent you from getting a mortgage. However, the type of employment change can matter considerably.
For example, moving from one salaried position to another may be very different from leaving a salaried job to become self-employed, starting a new business, or changing to a compensation structure that relies heavily on commissions, bonuses or other variable income.
Someone may be earning just as much—or even more—after becoming self-employed, but that does not necessarily mean the new income can immediately be used in the same way for mortgage qualification.
If you expect to buy a home in the near future, talk with your loan officer before making a major employment or compensation change. Understanding the mortgage implications ahead of time can prevent an unpleasant surprise later.
Don’t Open New Credit Without Discussing It With Your Loan Officer
A new car loan is not the only debt that can cause problems. New credit cards, personal loans, furniture financing, home improvement financing and other debts can also affect mortgage qualification.
Your credit may be reviewed again during the mortgage process. New inquiries, new accounts or higher monthly obligations can affect your credit profile and debt-to-income ratio.
Even if a retailer offers an attractive promotion such as deferred payments or special financing, check with your loan officer before opening the account.
Don’t Run Up Your Credit Card Balances
You do not necessarily need to open a new account to change your mortgage qualification. Increasing the balances on credit cards you already have can also create problems.
Higher balances may increase your required monthly payments and can also affect your credit utilization, which may influence your credit score.
Try to keep your credit profile as stable as possible while preparing to buy and throughout the mortgage process.
Don’t Move Large Amounts of Money Around Without a Plan
Mortgage lenders may need to document the assets being used for your down payment, closing costs and required reserves.
Moving substantial amounts of money between accounts can create additional documentation requirements because the lender may need to establish where the funds came from and verify the transfer between accounts.
There is nothing inherently wrong with transferring your own money. The issue is documentation.
If you are preparing to buy a home, keeping your funds organized and discussing significant transfers with your loan officer beforehand can make the mortgage process much easier.
Be Prepared to Document Large or Unusual Deposits
Not every deposit into a bank account creates a mortgage issue, and there is no single dollar amount that defines a problematic deposit in every mortgage transaction.
However, certain large or unusual deposits may need to be explained or documented depending on the loan program, the amount of the deposit and whether the funds are being used in the transaction.
If you are expecting a significant deposit from somewhere other than your normal income—such as proceeds from selling an asset—keep the documentation showing where the money came from.
Don’t Deposit Gift Funds Without Understanding the Requirements
Many mortgage programs allow eligible gift funds to help with a down payment or closing costs, but the gift may need to be documented according to the requirements of the particular loan program.
Before someone gives you money for your home purchase, talk with your loan officer about the proper way to document the gift and transfer the funds.
Doing it correctly from the beginning is much easier than trying to reconstruct the paper trail afterward.
Don’t Co-Sign for Someone Else’s Debt
Co-signing a car loan, student loan or other debt for a family member or friend can affect your own mortgage qualification.
Even if someone else intends to make the payments, you are legally obligated on the debt when you co-sign. Depending on the circumstances and applicable mortgage guidelines, that obligation may need to be considered when you qualify.
If buying a home is in your plans, speak with your loan officer before co-signing for anyone.
Don’t Close Credit Accounts or Make Major Credit Changes Without a Reason
Homebuyers sometimes assume that closing unused credit cards will improve their credit before applying for a mortgage. That is not necessarily the case.
Closing an account can change your available revolving credit and overall credit profile. Similarly, paying off collections, disputing accounts or making other significant credit changes can sometimes have unexpected consequences.
If your goal is to improve your mortgage qualification, it is better to develop a plan based on your actual mortgage credit report rather than making changes blindly.
Keep Your Financial Documentation Available
During the mortgage process, you may be asked for updated bank statements, paystubs, tax documents or other financial records.
Keep relevant documents readily available, including documentation for unusual transactions, asset sales, transfers or other financial activity that may need to be explained.
Good documentation can prevent a simple question from becoming a last-minute closing problem.
Continue Being Careful All the Way Through Closing
A mortgage pre-approval is not the end of the qualification process. Your financial circumstances can continue to matter until the loan closes.
Avoid making significant changes to your employment, income, credit, debts or assets without discussing them with your loan officer first.
That includes the period before you apply, while you are shopping for a home, after your offer is accepted and all the way through settlement.
The Best Way to Avoid Mortgage Sabotage
You do not need to put your entire financial life on hold because you want to buy a home. The important thing is to understand how a major decision could affect your mortgage qualification before you make it.
If you are considering changing jobs, becoming self-employed, buying a car, financing a major purchase, moving a large amount of money or making another significant financial change, call me first.
A quick conversation beforehand can be much easier than trying to fix a mortgage qualification problem afterward.
Thinking about buying a home?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com.
