If you have been approved for a mortgage for your next home, you might be assuming you can breathe easy now and concentrate on packing. Not quite yet though.
While most of your hard work of building a good credit profile and gathering savings for a down payment and closing costs is behind you, it’s important to remember that the lender will recheck your credit just prior to your settlement date and will also need confirm a few details such as your place of employment to make sure nothing has changed.
That’s the key phrase—“nothing has changed.” You will want to maintain the same credit profile you had for the loan approval until your mortgage paperwork is completely signed.
Avoid the following actions to ensure a smooth settlement:
1. Don’t apply for new credit: It may seem natural to apply for a credit card at a home improvement store or a furniture store when you are about to become a homeowner. It’s almost become cliché in the mortgage industry, but the warning still bears repeating: Don’t buy a truckload of furniture until after your loan closes. Applying for credit can lower your credit score. Not only will you lose a few points because of a credit inquiry, but if you are approved for new credit, a lender may worry that you will spend up to your new credit limit and then default on your loan. If you absolutely need to obtain new credit or accrue debt before closing, talk with your loan officer as soon as possible.
2. Don’t close any credit accounts:You may be feeling that this is a good time to get your financial house in order by closing unused credit accounts or transferring your debt to a new credit card with a zero-interest balance transfer offer. While that’s a smart move financially, it’s a bad one for your credit score because you lose points when you have a higher usage of debt compared to your limit on one credit card and to your overall credit availability. Wait until your closing is complete before you make these changes.
3. Don’t shuffle around your dollars & cents:Your lender will need the most recent bank statements before you go to settlement, so if you have any unusual deposits you will need to provide complete documentation of where the money came from. If possible, it’s best to move the cash you will need for your home purchase into one account before you apply for a mortgage. If not, make sure you have complete and accurate records readily available.
4. Don’t increase your debts:In addition to your credit score, your debt-to-income ratio is extremely important to a loan approval. If you take on more debt you could be in danger of going above the maximum acceptable debt-to-income ratio. Along with increasing your debts, do not co-sign on a loan. It is especially risky during the mortgage lending process since you will be financially liable for someone else’s debt.
5. Don’t skip a payment or make a late payment: One of the most important elements of your credit score is your history of on-time in-full payments. Payment history comprises about a third of your credit score.
One solitary 30-day late payment can clip 60 to 110 points from your credit score. Maybe not a huge deal if you had an 800 score, right? Possibly. However, if that 30-day late payment is a mortgage or rent payment, some lenders will boot your application altogether. Many will require at least 12 consecutive months of on-time payments in order to qualify for a home loan. So don’t get so caught up in your move that you forget to keep up with paying basic bills.
6. Don’t buy a car: You may be feeling that a new car would be a nice addition to the driveway of your new home. Resist that feeling. Even if you can easily afford a new car, the depletion of your savings or the addition of a new car loan could derail your mortgage application. Wait until after you have moved to switch to a new car.
7. Don’t change jobs if you can help it: While a job change could mean a raise or a path to a better future, it could also delay your settlement. Your lender needs to verify employment and will need paystubs to prove your new income before your loan can go to settlement. Lenders crave stable, reliable income that’s likely to continue.
Lenders are likely to slam on the brakes if you take a new job in a different field, or if you decide to start your own business. Or even if you get a promotion but see some or all of your income shift to a commission basis.
The bottom line: Any change to your employment is significant. Keep your loan officer in the loop, and ask questions when in doubt. The last thing you want is to waste time and money on a home loan you have little chance in getting approval.
*****In other words, no matter how hard it is at this exciting time, it’s better to do nothing than to do anything.