By: Tony Dankha
Imagine this – you get approved for a mortgage for the house of your dreams, and you can’t wait to furnish it! You start imagining that big oak table in the dining room and the super comfy couch right in front of the 70-inch TV. Before you know it, you’re on various websites looking at all the furniture you’ll buy on that zero percent APR credit card they’re offering you. Sounds great, right? Not so fast!
When you get pre-approved for a mortgage, your loan officer evaluates your income, credit, debts, and assets in order to figure out what exactly you are qualified for. Getting that pre-approval can be an exciting milestone in your homebuying journey, but that journey can get treacherous if you are not careful.
Here are some of the things you should be aware of:
New Credit Cards
Any negative changes to your credit score can have adverse impacts on your pre-approval evaluation. A hard credit pull always lowers your credit score, and this can make a huge difference if your score was already very close to the threshold. This can also generally impact the rate on your mortgage. Additionally, closing any accounts or credit cards can also have a negative impact on your credit score, so stay away from closing credit cards as well.
This is where that scenario I mentioned earlier comes in. It’s tempting to start shopping for furniture even right at the start of the process because you are so excited to move in and start a new chapter in your life. But any large purchases may cause unnecessary bumps in the road if you’re not careful. It’s important for you to keep this in mind regardless of whether you make the large purchase in cash or on your credit card. Using a credit card for a big purchase will increase your debt-to-income ratio and using cash will impact your savings. Remember to keep credit utilization under 30%, and, in general, wait until after your closing to start making big purchases.
Late or Missed Payments
Credit utilization and hard pulls definitely cause some negative points on your credit score, but the big culprit is payment history. Once you get your pre-approval, continue to monitor your due dates and make sure you are making consistent payments on your loans and credit cards. Late or missed payments - 30 or more days - can hurt your credit score.
Switching or Leaving a Job
Another factor the pre-approval offer relies on is your current employment. Any changes in your employment situation including a new job, becoming unemployed, or receiving a pay less than the original income amount you listed may cause issues for your final approval. Sometimes, this is out of your control, and for those instances, you want to make sure you are communicating changes to your lender and providing the necessary documentation that proves you have a steady source of income. Although in some cases, this type of change can thwart the process all together, if you get a new job in the same industry for a higher pay, a few pieces of documentation will put you back on track.
Large Deposits of Withdrawals
Your lender will always ask you for several months’ worth of bank statements. These are required to prove that you will be able to pay for a house with money you have. So what happens if you make a large cash deposit or withdrawal? Well, without a paper trail proving where the money went or where it came from, you will raise some red flags for your lender. Stay away from deposits or withdrawals of this kind, and if you are getting money gifted to you towards the down payment, be sure to provide your lender with a gift letter.
If you’re ever unsure about how a decision or action on your part can impact your chances of getting that final approval, ask your lender. Every loan officer works hard to get the client to the closing table; that’s our goal, as much as it is yours. Your loan officer will always help you along the way.