So, you were recently pre-approved for a mortgage. Congratulations! But don’t pop the champagne until closing day and all the home loan documents are signed and recorded. Despite what you might hear, there are plenty of things you can do to kill your mortgage approval before closing day.
Here are some of the most common and important items:
#1 The Loan Commitment
You might not have heard about this one, but it is important. Since the housing crash, there have been many changes in loan regulations and the accompanying documents. You should carefully review your loan commitment, so you are aware of any conditions for final approval of the mortgage.
For example, you may need to provide more information about gaps in your income history, an explanation for where the down payment came from and your final salary numbers for last year.
These might seem like pesky details, but federal regulators have really cracked down on lending practices in the last several years. The government wants to be certain lenders are really verifying that people can pay their mortgages. The last crash happened because lenders were not carefully checking that people had the income to afford their loans.
#2 Confusing Loan Approval Amount with What You Can Afford
If you get approved for a $300,000 loan, it does not really mean you can get a home for $300,000. The spending limit is probably less than that; your monthly payment will include a lot of extras, such as homeowner’s insurance, taxes, and private mortgage insurance.
It also is important to have an emergency fund to cover major repairs.
Whatever amount you have been approved for, it is a good idea to determine a monthly payment that you are comfortable with that is well below the maximum. That way you will not be financially stressed in the coming years as repairs and extra expenses come up.
#3 Paper Trail Problems with Income
When you are buying a home, you probably are looking for extra cash wherever you can get it – from bonuses to help from your parents in some cases. But with the state of lending laws today, you want to be careful to have a good paper trail for every dollar that is not coming from your regular, monthly income. So, any cash deposits or checks that are not a part of your regular paychecks will need to be explained with paperwork.
If you get some help with your down payment from in laws, for example, this is generally ok, but you will need to have it documented that it is a gift and not a loan. This will be needed for the mortgage file.
#4 Assuming It Will Be Easy as a Repeat Home Buyer
Whether you get your loan finally approved or not comes down to the underwriter decision. No matter who you are or how many times you have bought a home, the underwriter is required by law to evaluate your credit, capability, collateral and character.
Underwriters don’t, and can’t, make any allowances for repeat buyers, or for new buyers for that matter. Underwriting is closely regulated by federal law, and the number of homes you have bought before is not part of the equation.
#5 Making Major Purchases
Until you have signed everything at the closing table and those documents have been recorded with the local government, the mortgage lender is largely in charge of your financial situation. So, you should not make major purchases on credit cards, nor should you go out and buy a $100,000 yacht on credit. Anything that will lower your credit score and affect your debt to income ratios is not something you want to do until the loan is really done. The lender is required to recheck your credit right before closing, so make sure nothing has changed on your credit report.
#6 Paying Bills Late
You would be surprised probably, but more than a few people get a mortgage pre-approval and then slip up and pay bills late. If you get any black marks on your credit report before you close the loan, that could derail the entire deal.
#7 Getting New Credit
When you have your pre-approval, now is NOT the time to go get new credit cards or a car loan. Let it wait until the loan is final and you have moved into your new home. Also, every time you apply for credit, it lowers your credit score. That is the last thing you want when you are getting a mortgage.
If you make sure that you do not do any of the above mistakes when you are getting your mortgage, the chances of getting final approval and the keys to the front door are much higher!