Article updated on 2/5/2019
There are no shortage of tips on how to get a mortgage, but there are also ways to lose one. That may come as a shock after so much preparation and paperwork, but even borrowers with solid credit and strong incomes can miss a good mortgage deal because of a surprise snag that could have easily been avoided.
Actions and decisions that may seem minor or even logical during the mortgage application process can have surprising consequences, such as delaying the loan, losing a locked interest rate or even rejection of the mortgage application altogether. A loanDepot licensed loan consultant can answer these and any other questions you might have about the lending process. Call today for more information.
Here are seven traps to avoid whether financing or refinancing a residence:
According to The Qualified Mortgage Rules which were released several years ago in order to combat the high rates of consumer loan delinquencies and defaults (such as the ones experienced during the last recession of 2008), lenders need to make sure a borrower can afford a mortgage before issuing the loan. This rule, still in effect today, obligates all lenders to verify certain underwriting factors to determine the borrower’s ability to repay. Under the rule, lenders must generally find out, consider, and document a borrower’s income, assets, employment, credit history and monthly expenses.
Since lenders like to see income and employment consistency, changing job after applying for a loan could result in negative consequences for the potential borrower. Taking a new teaching position after a 10-year career in teaching means you're in the same field, but going from teaching to transmission repair or from a salary to commissions as a real estate agent is a leap that may not point to the employment and income consistency that lenders want to see. The issue is not the new job or the choice you have made, but rather the lack of an employment history in the new field.
Here are a few job changes that could raise a red flag:
- Changing to a completely different industry of position
- Switching from salary to a bonus or commission structure
- Moving jobs with no change in pay, responsibility, or location
The bottom line: It is advisable to keep your job until after the loan closes.
MAKING A BIG PURCHASE
Lenders will check your credit initially when you apply for a loan. They will also sometimes re-check your credit prior to loan closing. The last thing they want to see is a big purchase on credit, so don't buy a car, truck, piano, refrigerator, etc. In fact, don't make any big purchases at all. When you apply for a loan, lenders must ensure that you meet certain standards. Those standards – things such as the loan-to-value ratio (LTV), down payment amount and source, and your debt-to-income ratio (DTI) – are carefully measured. By making a big purchase, borrowers can cause the numbers to change. That means the numbers need to be run again, and if they exceed guideline maximums, the loan must be restructured and could potentially be declined.
The bottom line: Avoid large purchases until the loan is closed.
MAKING LARGE DEPOSITS
It might seem counterintuitive, but big deposits in savings or checking accounts can create additional scrutiny from lenders. Lenders want to know that borrowers have the ability and discipline to save, especially for a down payment. While documented gifts may be welcome, the sudden appearance of large deposits can set off an alarm with loan underwriters, the people who check borrower applications against mortgage guidelines. Is the deposit a loan from a family member or friend, whereby a repayment is expected? If so, what are the terms of repayment? The monthly payment would have to be included as a liability and counted against the borrower’s income. This could cause the debt-to-income ratio to exceed guidelines.
The bottom line: If you receive a big deposit immediately preceding and/or during the application period – a bonus, for example – tell the lender and document the source.
NOT DISCLOSING/REPORTING DEBT
Failure to disclose your debt could limit the amount of money you are able to borrow or even worse, keep you from qualifying for the most favorable rates. By looking at your loan file documentation such as bank statements or paycheck stubs, the underwriter will check for unreported debts not included in your credit report. Lenders want to know about every debt because they must assure that your finances meet loan standards.
Here are some of the debts to disclose to your lender:
- Real estate loans
- Car loans
- Revolving charge accounts (credit cards and lines of credit)
- Alimony and child support
- Job related expenses (union dues)
The bottom line: Disclose and report all of your debt.
OPENING NEW LINES OF CREDIT
Whenever you apply for new credit, one of the first actions a lender will take is what’s called a hard credit inquiry. This type of inquiry will generally have a negative impact on your FICO score, lasing on your report for two years. Lenders are not big fans of seeing hard credit inquiries because it makes the consumer appear desperate for a loan. While it’s considered normal behavior to have one or two new credit card applications in a year, applying for one during the ‘quiet period’ between the original file pull and the loan closing could result in a complete mortgage denial.
Borrowers sometimes incur additional debt without thinking it will have an impact on their mortgage application. Imagine there is a sale on new cell phones and you can get 20 percent off if you buy them with the store's credit card, so you open an account and get your new phones with no money due for the next three months. By opening the account, you have created another line of credit. That credit line, and what you borrow, can change your application numbers and jeopardize your application.
Along with running your credit at the beginning of the process, lenders will pull it again the day before or the day of closing. When they do, they will see if you’ve taken on any new significant debts that could affect closing.
The bottom line: Don't open any new credit lines until the loan closes.
MISSING ONE OR MORE DEBT PAYMENTS
If you miss a payment during the loan application process – particularly a mortgage payment – and the lender re-checks your credit report, it could result in a much lower credit score and potentially derail your loan application.
A related concern is an incorrect late or missed payment showing up on your credit report. In this case, you will have to contact the credit-reporting agency to show that the item is incorrect or out of date. Documentation will be required and speed is important because if you have locked your loan rate you don't want a credit dispute to slow the application past the lock deadline.
The bottom line: Pay every bill immediately when it comes due during the application process, because paying early assures accounts are properly credited.
CLOSING CREDIT CARD ACCOUNTS
This is another counterintuitive problem. If you close a credit card account, isn't that a positive financial event? Seems reasonable, but in practice if you close an account your credit score might decline and a lower credit score can result in a higher mortgage rate. Lenders are very interested in credit. They like to see that you have credit and that by and large you do not use much of it.
Imagine you have three credit cards:
Card A has a $5,000 limit and you have borrowed $1,000
Card B has a $7,000 limit and you have $3,000 outstanding
Card C has a $6,000 limit and you have a $0 balance
In total, you have $18,000 in available credit and $4,000 outstanding balances, so 22 percent of your available credit is in use.
Now if you close Card C, the numbers look like this:
You have $12,000 in available credit and $4,000 in outstanding balances, so 33 percent of your available credit has been used.
33 percent versus 22 percent is a big difference. By closing just one account, it appears that your credit usage has increased quickly and substantially.
The bottom line: Leave credit accounts alone until the mortgage has closed.
So there you have it, seven ways to lose a loan application that can be avoided with a little prudence and planning. Taking these necessary measures and staying proactive can be the key to your new home!
For more information, speak with a loanDepot licensed loan consultant now.
Maximizing your appraisal when refinancing
6 steps to a smooth closing on a refinance
How a borrower's mortgage rate is determined
Getting a home loan after a short sale or foreclosure