Things homebuyers should avoid
Making other major purchases or applying for new credit can turn experience into big hassle.
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It’s important to understand that any major changes in personal income, assets or debt can alter the terms your mortgage, or tank it altogether. If you’re not sure how an action may affect your application, ask your loan officer for advice.
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A mortgage application is an intensive, fragile process undergoing deep scrutiny by a host of lenders, banking systems, credit reporters, and government standards. Any of these can delay or deny your mortgage application, no matter how far along you are! Once your mortgage application has started, under no circumstances should you conduct the “do not” activities without first speaking with your Loan Officer at PennFirst! It could cost you your loan.
You have done the hard part in the homebuying process and chosen a lender and a real estate agent to work with. You have also gone out and found the home of your dreams! Best of all, your team has done a great job of negotiating the best deal for you.
Now, as a buyer, all you have to do is sit back and wait for your loan to close.… right? Wrong!
Getting a home loan these days is a very interactive process. I am always amazed by how many clients I work with who come to me unaware of all the pitfalls they face during the loan process. To help avoid any surprises while waiting for final approval, I provide my clients with a short list of “do’s and don’ts” to follow.
DO Actions During Mortgage Process:
- Do Continue to make your mortgage or rent payments on time
- Do keep the process moving by responding to your loan officers’ requests for documentation as soon as possible.
- Do make decisions as soon as reasonably possible.
- Do convey questions or concerns you have as they develop.
- Do continue to work your normal work schedule with no unplanned time off.
- Do continue to use your credit as normally as possible, normal size transactions.
- Do be prepared to explain any large deposits in your bank accounts.
- Do enjoy purchasing your home but remain objective throughout the process to help make decisions that are best for you.
- Do Stay current on all existing accounts
- Do Continue to work for the same employer
- Do Continue to use the same insurance company
- Do Continue living at your current residence
- Do Continue to use your credit card as you normally would
- Do Keep credit card balances at or below 40% of credit limits without major fluctuation. Do NOT change credit limits!
- Do Call us before doing anything regarding your employment, credit cards or assets.
- Do Have proof of your down payment source.
DON’T Actions During Mortgage Process:
- Do not make any major purchases (car, boat, jewelry, furniture, appliances, etc.).
- Do not Forget to Pay Your Bills
- A late payment hit on your credit report could devastate your closing. Because payment history accounts for approximately one third of your credit score, a 30-day late payment could clip 60-100 points from your score.
- Bank Accounts:
- Do not change bank accounts.
- Do not make unusual deposits into your bank accounts or move money around from one account to another.
- During the verification process of your loan, your lender will ask you for the past 60 days of your bank statements. You will have to explain any unusual deposits and provide documentation for where the extra cash came from.
- Do not Transfer checking or savings balances from one account to another
- Do not Transfer large amounts of funds
- Lenders review your banking history within the last couple of months to assure there were no large deposits made. A large deposit could be a red flag.
- Do not Deposit cash or non-traceable funds
- Do not Borrow money, documented or otherwise
When it comes to your credit, you shouldn’t make any drastic changes. By opening a new line of credit, you’ll create an inquiry on your credit report, which can lower your credit score.
- Do not apply for any new credit
- Do not make any changes to your credit profile.
- Do not Close credit card accounts
- Instead of closing out credit accounts, just pay them off monthly like you typically would. Closing credit accounts can be dangerous if you have debt because your debt takes up a higher percentage of your available credit, which can drastically hurt your credit score.
- Do not Max out or over charge existing cards
- Do not Consolidate your debt into fewer accounts or pay off old collections
- During the pre-approval or loan commitment stage, your lender will pull your credit report. If you have any outstanding bills that went to collections, your lender will make sure you are aware of those.
- Paying an old bill that went to collections brings that discrepancy to the present and can drop your score significantly.
- Do not: Open a New Credit Card or Make a Large Purchase on a Credit Card
- Opening a new credit card will lead to another inquiry on your report and could potentially drop your credit score. The interest rate you receive from your lender could be affected if your score drops and you haven’t locked yet or could knock you out of qualifying range altogether.
- Do not Finance a new car.
- It is not advisable to buy a new vehicle with credit or make any other large purchase on credit for that matter. Adding a large monthly obligation like this will affect your debt to income ratio and can either reduce the amount of mortgage your are qualified for or even make you ineligible for a mortgage loan.
- Do not Co-sign on a loan for anyone
- When you are preparing to apply for a mortgage, you should not cosign on a loan for anyone. Lenders will include this monthly obligation into your debt to income ratio and it can affect the amount of mortgage you are qualified for.
- Job & Occupation:
- Do not Quit or change jobs
- Your employment status is checked during the processing of your loan and will be checked again before your loan closes.
- Lenders like to see stable employment history on a mortgage loan application. Changing your employer, especially if you are changing your career field can hamper your chances of getting approved for a loan.
- Do not Switch from a Salaried/Hourly Job to Commission-Based
- Your mortgage lender uses your income to determine affordability of a new home alongside your other debts.
- Do not Quit or change jobs
- Do not Start any home improvement projects
- Do not Raise red flags to the underwriter (i.e. co-signing on another person’s loan, change your name and address)
- Do Not Make Big Purchases or Lifestyle Changes
- You’ll also want to avoid any major lifestyle changes, if possible. Whether it’s adopting a child or finally deciding to quit your job and join the circus, you don’t want your underwriter to think you’re anything but responsible when it comes to money; big changes like babies can put a strain on your bank account.
- Do not Plan a vacation during your loan transaction without informing your loan officer
- Do not give notice to your landlord before consulting with your loan officer
- Do Not Forget Important Paperwork
Notes On the Process:
The loan is approved, the contract is signed, the title is clean, the closing date is set, and everything seems on track to get that home. And then some people do the unthinkable that costs them their dream home.
“I’ve had clients call me and say they’ve quit their job, or bought a new car,” just before close, says Mark Livingstone, a mortgage broker with Cornerstone First Financial in Washington, D.C. “All I can do is say ‘what were you thinking?’ I’ve seen a number of deals fall through that way.”
It’s tempting to splurge just before you buy a home. Don’t do it. At least, not before you close.
“Banks are going to question almost any meaningful transaction you make while you’re applying for a mortgage,” says Douglas Boneparth, a financial planner in New York City. “So, until you close and the keys are in your hands, you are under the magnifying glass,” he says.
There’s one thing most people don’t understand in the home-purchasing process: Their credit is monitored, right up to the day they sign the contract says Tom Wind, executive vice president of home lending for EverBank in Jacksonville, Fla. “When people think they’re approved [they also think] they’re done,” he says. “They’re not done until the loan closes,” he said.
Wind says, the bank assumes you’ll be making a monthly payment straight from the start, which will likely throw off your debt-to-income ratio. “All that installment debt goes on your credit before you make a payment,” he says.
Even if you avoid the temptation to splurge before the close, another frequent hiccup occurs when home buyers switch jobs at the last minute, Wind says. “People think in their mind it doesn’t make a difference if it’s company A or company B” Wind said. “It’s going to be an issue,” he said. “If you’re not talking to your lender it could delay your closing or put your deposit at risk,”
Many buyers opt to borrow from their 401(k) accounts or withdraw from their IRAs. What you shouldn’t do, says Boneparth, is use cash advances from your credit cards to bring more cash to the table.
It’s also important to let your lender know if you’re getting large deposits, such as gifts from family members or withdrawals from your IRA to help with the down payment,
If you’re not sure, ask!
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