Home buyers must remain vigilant during the period between pre-approval and closing on a house in order to avoid increasing their interest rate or, worse, losing the home they have their hearts set on!
There are many mistakes buyers must be wary of making while purchasing a home and not all of them are as obvious as others. Causing changes to your credit score, for example, will force the lender to regenerate your disclosure agreement and leave you with higher monthly payments for the next 15 to 30 years. Something as simple as moving money from one account to the other can trigger this!
Lenders determine your borrowing power by scrutinizing a host of factors and providing you with a pre-approval based on their analysis of your overall financial standing. Factors such as:
- FICO credit scores and history
- Down payment amount
- Assets
- Income
- Employment history
- Tax returns
- Bank statements
- Loan amount compared to home value
- Debt-to-income (DTI) ratio
- Rental history
Your pre-approval is not set in stone. Your lender is not going to just look at your finances once and trust they are going to stay that way. They will continue to check on them throughout the whole process to ensure you are going to be able to pay for your new home. Since this is the case, you must be careful to not do anything after pre-approval that will make them uncertain of your borrowing power and ability to pay your mortgage.
The key during this period between pre-approval and closing on a home is consistency.
Your pre-approval was determined by your current level of debt and income, so you need to keep them as close to the same as possible during this time.
DO NOT MAKE CORRECTIONS TO YOUR CREDIT REPORT
You may be tempted to look at your credit report and make changes to improve it or even correct errors you find. Any of these changes you want made to your credit report need to be completed before you are pre-approved!
Even if you think it will make a positive impact, it will make your lender create a new disclosure agreement, delaying the process and potentially costing you more money.
Just the application for a new credit card will dock points on your credit score.
DO NOT ESTABLISH ANY NEW CREDIT
Getting a new credit card directly affects your credit score. The equations used by lenders to determine your mortgage rate are very delicate and even just a couple of points will make a significant difference.
While a new line of credit can help lower your credit utilization, it will lower the overall age of your accounts, which plays a major role in your score as well. When a lender sees a new credit card on your record, this can lead them to think you might face a cashflow problem soon and they will be inclined to raise your rate or even deny you a loan.
On this note, don’t request any increases on your credit limit either. It can also look like a cashflow issue to lenders, as well as put a “hard inquiry” on your report, which deducts points from your score.
DO NOT CANCEL ANY LINES OF CREDIT
Canceling a line of credit, even one that you never use, can negatively affect your credit score. For one, it can remove your history of using that credit from your report, lowering your score. It will also change your credit capacity – your ability to borrow money quickly. Lower capacity = lower score. Remember, you are aiming for consistency right now, so avoid making any changes without discussing them with your lender first!
DO NOT USE YOUR CREDIT CARDS
Any purchases you make with your credit cards are going to make a difference in your score, which will affect your upcoming home loan. Only use your credit cards to make small purchases that can be paid off quickly. You do not want to add more debt to your record during this period because it can not only delay your closing but also affect your mortgage rate.
Avoid maxing out or getting close to maxing out any of your cards, because how much you owe in relation to your credit limit is another factor that plays into your credit score.
Major purchases, like a new car, will appear on your credit report as a hard inquiry.
DO NOT MAKE MAJOR PURCHASES
No new cars. No new boats. No new appliances or even new furniture for your future home until you are completely finished with the buying process!
Major purchases during this time need to wait, especially if they will require payment in installments. These lower your credit score because they increase your DTI ratio and make you look like a riskier borrower in the eyes of lenders.
Since these purchases directly influence your credit score, you run the risk of delaying your closing or being denied.
DO NOT SWITCH JOBS
It is recommended to not make any changes to your employment during the home-buying process. Lenders want to see that you have a stable income from a job that you have had for at least 2 years. Yes, your income is a major factor here, but your employment history is just as important!
Even transitioning from one company to another within the same industry will be viewed with uncertainty and cause your lender to raise your interest rate. Switching industries completely is an even bigger no-no and will be reason enough for a lender to deny you a loan.
If timing is not on your side and a can’t-miss-opportunity arises, try to just accept a verbal offer until you close or let your lender know the circumstances right away and see what they suggest.
DO NOT CO-SIGN ON ANY OTHER LOANS
No matter if it is for a family member or close friend, you absolutely do not want to co-sign on any loans. You can insist to your lender over and over you won’t be making any of the payments and that it won’t affect you at all, but at the end of the day, you are putting yourself on the line for that debt and it will lead to a lengthy delay, a higher mortgage rate, or a flat-out denial.
DO NOT MAKE ANY LATE PAYMENTS ON EXISTING DEBT
This is the time to show you are a reliable borrower, so it is crucial to make those payments on time. You can be pre-approved with late payments on your record, but having any new ones show up on your record during this period is going to drop your credit score and force your lender to reassess your loan.
KEEP YOUR BANK ACCOUNTS PREDICTABLE
Do not make any large withdrawals or deposits. Your checking and savings accounts are carefully considered by lenders, not just for what is in them currently, but by how money moves in and out of them. Withdrawals, of course, look risky to lenders, but large, random deposits also raise suspicion. Lenders will think these are done to make you look wealthier and are going to be paid back later.
If you plan to receive money from someone to help you buy a home, it needs to be done as a “gift”, meaning there needs to be a formal gift letter to accompany the money proving it is not expected to be returned later.
Do not move money between your accounts either. Moving large sums around will raise concerns with your lender since it will be hard to prove the money is actually yours. It is also recommended to not open any new bank accounts, because your lender may see this as you trying to hide funds that are going to be used for undocumented debts.
Don’t Be Discouraged, You Got This!
It’s important to remember that no matter how big or small – ALWAYS ask you lender before making any decisions! Ellen is an expert at matching buyers with local, trustworthy lenders, as well as informing them on how to keep their finances in tip-top shape while purchasing a home. Send her any questions you may have about what you should and shouldn’t do during this period!
With so many rules and guidelines to follow during this time, it can seem like you are running through a maze of booby traps trying to ruin your chances of buying a home. Utilize tools, like Credit Karma, to help keep you on track while closing on a home and, of course, work with a local lender who will be there to answer your questions and provide you with the guidance you need to navigate this sometimes confusing process!
