You got your mortgage pre-approval – congratulations! You are one step closer to owning a home. Before you get too comfortable, though, understand the mistakes that can cost you the approval.
Damaging Your Credit
Lenders base your preapproval on your current credit score. They expect that credit score to remain the same or at least close when you close on the loan. In order to ensure this, lenders pull your credit at least one more time before you close. This means don’t do any of the following:
- Open new accounts – New accounts lower your average credit age, which decreases your credit score
- Close old accounts – Closing unused accounts lowers your average credit age, decreasing your credit score
- Pay your bills late – Any bills paid more than n30 days late damage your credit score
Lenders also use your employment information during a preapproval. Most lenders look for a 2-year history at the same job or at least within the same industry. Your employment matters for two reasons:
- Consistency and reliability
Obviously, your job provides the money to cover the mortgage. But, it also shows lenders that you have the reliability and consistency to make an income moving forward. If you change jobs before you close on the loan, lenders start the approval process over again. Many lenders require you to be at a new job for at least three months before they’ll consider it. This can delay your closing or even cancel it.
Changing Your Income
Along the same lines of changing jobs is a changing income. Lenders re-verify your income before you close on your loan. Lenders can find out if you changed jobs or even if you have different income. Higher income doesn’t hurt, but lower income does.
Your income determines your debt-to-income ratio. If you lost income, your DTI increases. Depending on how much the DTI changes, you may lose your approval. Each loan program has specific debt ratio requirements that if you exceed, you lose your loan approval.
Buying a home is exciting, but don’t let the excitement cause you to overspend. Buying furniture and appliances on credit, for example, does two things:
- Lowers your credit score – Your credit score includes a calculation of your utilization ratio. This is a calculation of your outstanding debts versus your income. If you increase those debts, you increase your utilization ratio and potentially lower your credit score.
- Increase your debt ratio – The more outstanding debts you have, the higher your DTI or debt-to-income ratio becomes. If the new debt pushes your DTI over the limit, you could lose your approval.
Paying Off Your Debt
It sounds counterintuitive, but don’t pay off all of your debt. Or at least talk with your lender before doing so. You may think that starting homeownership with a clean slate is smart – and it may be, but you have to look at the big picture.
If you pay off all of your debts, what’s your bank account look like? Are you cleaned out? Do you still have money for the down payment and closing costs? Does your pre-approval require mortgage reserves (money on hand to cover your mortgage payments)? If you pay off your debts but leave your bank account empty, you could lose your approval.
Co-Signing on a Loan
You may think helping a relative or friend get a loan won’t affect your credit, but it does. As a co-signer, you are responsible for the payment if the borrower defaults. In other words, the loan shows up on your credit report too. If the borrower makes payments late or misses them altogether, you are financially responsible and/or your credit score may suffer.
Even if the borrower makes the payments on time, the new loan affects your debt-to-income ratio. If the expense is too high, it could knock your DTI higher than the allowed ratios, causing you to lose your loan approval.
Making Large Deposits
This mistake may seem strange. Why wouldn’t a lender want you to make large deposits after pre-approval or at any time? It comes down to the funds’ origination. Lenders worry that any large deposits are a result of a new loan. If you make a large deposit within 60 days of closing, the lender needs to know where the funds came from. Are they a loan? Did you sell an asset? Was it a bonus or a tax refund? Without proper documentation, large deposits could ruin your preapproval.
After you get a mortgage pre-approval, try keeping your financial life status quo. Keep your job and income the same and leave your credit as stable as possible. If you do make changes, discuss them with your loan officer first to see how they may affect your pre-approval.