Don’t Do This Before Applying for Mortgage
Buying a home is certainly an exciting event, but nothing will dampen the excitement faster than getting turned down for a mortgage. Sometimes it’s the easily avoidable actions on the buyer’s part that cause this to happen, like the following four…
Buy a Car
Yes, it would look great in the driveway of your soon-to-be new home. Unfortunately, the additional debt won’t look great on your mortgage application. When calculating the amount you can qualify for, the lender will look at how much debt you have versus how much income you make. A general rule of thumb is that your total monthly payments (including mortgage, credit cards, car loans, etc.) should be no more than 36 percent of your monthly income. Purchasing a big-ticket item and financing it will negatively impact this percentage (called the “debt-to-income ratio”) and decrease your chance of getting the loan you desire. Even paying cash for the car (boat, furniture, etc.) may not be the solution, as the lender will also take in to consideration your cash reserves when approving your loan. It’s best to be patient—buy the house first, then get other stuff later.
Getting a new job just before you buy a home will not always create a problem, but in certain instances it can. Suppose you are either a salaried employee or an hourly employee who works forty hours a week with no overtime. If you change employers while staying in the same line of work, you should be okay. But if you change to a completely different career, the lender will not look kindly on that. People whose income depends on commissions, bonuses or overtime have another challenge. Lenders like predictability and will take the “unpredictable” portion of your income into consideration only if you have a two-year track record of receiving it. Changing employers breaks that two-year continuum, and places your loan approval in question. Especially problematic is if you are thinking about abandoning the corporate world and becoming self-employed. Without a two-year track record you will almost certainly be turned down for a loan with a low interest rate and down payment. Therefore, if at all possible, stay at your current job until after you get the keys to your new home.
Shuffle Money Around
Wishing to better prepare for the home purchase, some people get the urge to consolidate their money into one account. Although that may sound like a good idea, it can unnecessarily complicate the mortgage approval process. One of the things lenders are particularly strict about is the source of your down payment money, so you will be asked to provide copies of your bank statements for the past few months. If there are any unusually large deposits or withdrawals, you will probably be required to provide an explanation and “paper trail” for each. It’s best to avoid this hassle and leave all of your money where it is, until you talk to your loan officer.
Fail to Get Pre-Approved
I bet you have heard this before, but darn it, it’s important so I’ll say it again: don’t get pre-qualified, get pre-approved. Yes, it sounds similar. No, it’s not the same. I am sure you will agree that finding out how much house you can afford before starting your house search is a good idea. Now, you can find out “kind of, sort of,” or you can find out for sure. Getting pre-qualified is finding out “kind of, sort of.” The lender will ask you a few questions, then give you a quick estimate right over the phone. Unfortunately, this estimate does not mean much since there are a number of factors that can affect your loan terms, and a quick pre-qualification will probably not reveal all of these factors. Getting pre-approved however is something different. You will have to fill out a loan application, answer a bunch of questions, provide proof of your income and down payment money, and have your credit thoroughly checked. You may even have to pay a small fee up front to cover the cost of your credit report. All of this will enable your lender to give you a written limited-time commitment to approve your loan once you find a suitable property. With this piece of paper you will know for sure what you can qualify for, so that you and your agent can start house hunting with confidence.
Personal Finance Blog
Starting in 2004, this blog series ran for 10 years. Click on the links below to read some of the posts.