8 Things to Never Do After Applying for A Mortgage
So, you’ve found your perfect home and have applied for mortgage approval. Next is the closing process, then you are a homeowner! But with every new home comes new furniture, paint, and decorations. However, you need to hold off on those until you get the keys, or at least talk to your lender first. If the lender thinks something is amiss with your finances before the loan is approved, they could delay or reject your loan application. Here are 8 ways to help avoid that scenario.
Buying a home is most often the largest purchase someone will make in their lifetime. While banks routinely give out hundreds of thousands of dollars to help people achieve the goal of homeownership, the lender must feel that you are financially responsible enough to pay back the loan and not default.
Don’t deposit large cash amounts into your account without talking to your lender
Lenders work off of the activity of the account(s) you plan on using to finance your down payment and earnest money. Recurring payments should continue and they will look to see how often and how much gets deposited into the account from your job. If you suddenly deposit $2,000 in cash, your lender will ask you where it came from, which could stall the approval process. Talk to your lender before depositing the cash so they know where it came from and how it affects your financial standing.
Don’t stop or increase credit card payments
The first half of this seems like a given, but it happens. Some buyers—in an effort to keep more cash on hand until closing—will erroneously reduce or stop credit card payments. This hurts the buyer in a major way. If the payments are less than or equal to the minimum, the balance will continue to accrue compound interest, driving the balance higher and hurting your credit score. Your credit score is one of the driving factors in your mortgage approval, so why would you want to put it in jeopardy? Continue the credit card payments on time and above the minimum plus interest. Your lender likes to see that you are managing your debts appropriately.
In addition, don't increase credit card payments in an effort to pay them down/off in a shorter time. Increasing payments can cause the lender to show you have less liquid funds, which can indicate you will have less on hand to close and/or make sufficient payments.
The same sentiment goes for car payments and student loans.
Don't make any large purchases
You may need a new washer and dryer, really want that brand-new truck, or are ready to realize your dream of having a pinball machine in the basement. Do not buy them until you close the deal and get the keys to the house. New debt and sudden large expenditures are huge red flags for the lender. Even if you provide proof to your lender of where the money went, they still likely won't like it.
Don't become a co-signer on loans for others
As a co-signer, you take on the obligation of paying a debt, whether or not you actually need to step in and help pay on the co-signed loan. Like we said earlier and will repeat down below, taking on new debt is a surefire way of hurting your mortgage approval chances.
Don’t change banks
Even if you hate your bank or are moving to a new city or state that doesn't have a branch, stick with your current financial institution until you close on your new home. Your lender looks at your financial history with your institution going back at least 2 years or more. If you change banks, your history with that institution starts at zero. This is also problematic if you are trying to get a loan through the institution you want to leave. Just tick it out for now
Don’t apply for new lines of credit
One final time: don't take on new debt. Gaining access to a new credit line increases your potential debt-to-income ratio, hurting your financial standing. In addition, credit pulls by multiple institutions in different sectors (automotive, mortgage, banking, etc.) will hurt your credit score, which can severely impact your ability to get approved for a loan, as well as the interest rates available to you.
Don't close any credit accounts
On the other side f the credit coin, don't close credit accounts. If you cancel a credit card, you are erasing part of your credit history, no matter how far back it is. With less credit history, your lender won't have access to as many financial records, which hurts your credibility when it comes to paying back your debts. In general, it’s a bad idea to close credit accounts, but doing so while awaiting mortgage approval is one of the worst times to do so.
Don't change jobs
If you haven’t noticed, a strong, consistent financial history is the key factor a lender looks at when approving your loan. Having a job with a steady paycheck as the primary source of income is what lenders love to see. To that end, don't get a new job, even if it pays more until after you close on the home. Even if that new job pays more, stay put. Increasing your earning potential changes everything about your financial standing. While it is better to earn more money, your loan qualifications have to change to reflect your income, which means restarting the loan approval process after you’ve gone under contract.
The same goes for quitting your job. If your income suddenly drops to zero, your mortgage approval chances basically fall to zero as well.
Now, if you lose your job (like many, many people did during the onset of the COVID-19 pandemic), not all hope is lost. You can most likely qualify for unemployment as long as you apply and actively seek new unemployment. If you lose your job, speak to your lender about your options. Your application could be paused until a payment plan comes together or you find a new job. Like above, your approval arithmetic must be reworked, but it's better than not having a job to start with. If not, you will be allowed to back out of the contract using the financing contingency. You will likely lose is your earnest money, but you can take a step back from buying a home until you find employment again.