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Homebuyers this year face stiff headwinds as supply dwindles, house prices rise, and competition gets fierce. Don’t complicate the buying process even more by making it harder to qualify for a mortgage.
Lenders take many steps to make sure you’re not a high risk of potential default—or involved in nefarious activity. But seemingly innocent behavior on your part could make getting for a home loan tougher or more expensive.
Here are five no-no’s that mortgage professionals routinely see applicants make.
Don’t open a new loan
One of the biggest qualifications for a mortgage is your debt-to-income (DTI) ratio. This figure is your total minimum monthly payments—including your hypothetical mortgage payment—divided by your monthly gross income. Ideally, you want to keep this percentage below 45%.
If you take on a new debt—such as an auto loan—that increases the front end of your DTI, making it harder for you stay under that key 45%. Exceeding that figure means either a higher mortgage rate, or in the worst case, a denial.
What to do instead: Stick with your clunker of a car while you close on your new home. After that, find your new wheels. The same goes for any other large debts, including co-signed ones.
Stop opening credit cards
Sure, it can be lucrative to open new cards for hefty sign-up bonuses, but that could also mean a higher mortgage rate. Every time you apply for a new card, the lender will pull your credit report for approval. This is called a hard inquiry, and it can dent your credit score around five points per inquiry.
That may not seem like much, but consider the following. With a 700 credit score, you would qualify for a 4.35% mortgage rate, according to recent figures from FICO. But a 699 score—just a point below—would increase your rate to 4.53%. Over the life of a 30-year, $200,000 mortgage, that’s $7,673 extra in interest you would pay.
What to do instead: Focus on maximizing rewards on cards already in your wallet. Also, pay down any balances to help reduce your overall DTI, another way to get a lower mortgage rate.
Don’t move money around
Money you’ve earmarked for a home purchase may be stored in several places—savings, brokerage and retirement accounts. You may also be expecting a sizeable contribution from mom and dad to increase your down payment. If you deposit all that money into one account right before you apply for a mortgage, expect to send your lender reams of paper showing each transfer.
“Lenders want to know where the money started and where it ended it up, so you need to be in a position to fully document that,” says Scott Sheldon, branch manager of New American Funding in California. This is because of The Patriot Act, which requires lenders to make sure money isn’t part of unscrupulous activity such as money laundering.
Typically, printouts of online account activity aren’t enough. To document transfers, you have to provide official account statements showing the money leaving one account and going into another. This extra paperwork could become a problem if you run up against contract deadlines or rate lock expirations.
What to do instead: Move any down payment funds and gift money into one central bank account at least two bank statements before you apply for mortgage. “If it’s in your account for 60 days, the lender won’t ask how it got there or where it came from,” Sheldon says.
Stop job-hunting
“If you are out looking for a job and a mortgage at the same time, one of those might not happen,” says Pava Leyrer, chief operating officer of Northern Mortgage Services in Michigan.
Mortgage lenders want to see stable employment history that can be easily documented. Lenders will require more paperwork if you switch jobs during the mortgage process, especially if you go from a salaried position to one paid by hour or commission.
What to do instead: If you change jobs, go from hourly to salary or from salary to salary within the same field. Keep records of hiring/quit dates, HR contacts and other pertinent information in case your lender needs more details.
Don’t change life circumstances—if you can help it
Leyrer has seen couples intend to buy a house together and then split up during the loan approval process. But one of them still wants to purchase the home and must re-qualify for a mortgage. In other instances, a borrower will try to add a fiancé at the last minute to qualify for a bigger mortgage.
There’s also a USDA home loan that requires the income of each person living in a household—despite who’s taking out the mortgage—to qualify for the loan. That means you need to know who’s living with you when you apply.
What to do instead: Run different lending scenarios at the onset. What can you qualify for on your own? How does that change with a co-borrower or people living with you? Alternatively, “just have your personal life figured out before you come in to apply” says Leyrer.
The article, 5 Moves You Should Avoid Before Getting a Mortgage, originally appeared on ValuePenguin.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
