One of the most rewarding experiences in life is finally being able to purchase that perfect house you have always dreamed of. In fact, 33% of all home buyers in 2020 were first time buyers1. For the majority of new buyers, buying a new home also means applying for your first home loan.
Applying for a new mortgage can be equally intimidating, especially when you are trying to juggle other tasks throughout the home buying process. But what many new homebuyers don’t understand is that there are several things that can impact your ability to qualify for a new mortgage even after you submit your initial offer and pre-approval.
What’s worse, if you do happen to inadvertently have changes to your income, assets, or credit, it could prevent you from qualifying altogether. While your lender may tell you what you need to do to qualify for a new loan, more often than not – they forget to emphasize what not to do.
Here are the top four things that you should not do and could cripple your chances for qualifying for a new home mortgage.
1. Apply for New Credit
The biggest mistake that you can make as a new borrower is applying for new credit while your mortgage application is still in process. Everyone wants to take advantage of that hot Black Friday deal and splurge on a new 55” flat screen TV or smart gadget, but the allure of financing larger purchases such as these on a retail credit card that offers a limited time discount on your purchase can actually be damaging to your mortgage loan application.
Your lender will need to investigate any recent credit inquiries that show up on your credit report. Even if the credit check came after they pulled your credit report for pre-qualification, lenders still can order credit supplements or even re-issue the report prior to close as a means to verify no new credit has been extended that they need to account for.
Ultimately, if you did open a new tradeline, the lender will need to get proof of the liability and factor that into your overall debt-to-income calculation. If your DTI was already on the edge, adding a new liability to mean the difference between buying that dream home or having your purchase fall through.
2. Miss Payments on Existing Accounts
What can be equally damaging to your mortgage application is not staying abreast of your current credit obligations while your lender is reviewing your application. Missed payments represent enhanced risk especially if they are within the last 24 months.
If you do have missed payments, expect your application to be further scrutinized to determine if you are likely to repay the loan if credit is extended. It is especially important to stay current on any installment debt which includes, but is not limited to, any mortgages, student loans, or auto loans that you may have.
3. Switch Jobs or Employers
While it may seem tempting to switch employers to leverage better benefits, higher compensation, or even a more flexible work schedule, any disruptions with your existing employment situation could result in a delay or possible disqualification of your mortgage application.
Lenders look for steady employment as a factor of determining stable and recurring income that can be relied upon to repay the proposed mortgage obligation. If you switch employers after your income has already been reviewed, it can throw all your ratios out of whack.
For example, if you make less money at your new job, your DTI could be pushed to and surpass the acceptable lending guidelines. Similarly, if your compensation changes from a traditional salary to solely-commissioned based, and you have no history of ever earning commissions before, your income could be ineligible altogether.
Furthermore, you will also need to provide a letter of explanation for any gaps in your employment history. Start and end dates do not always overlap. Lenders may even require additional reserve funds be verified where necessary.
4. Make Undocumented Large Deposits
Living in an age where digital platforms provide markets to sell unused or unwanted household items or even earn money on the side providing rideshare services, you can be earning money from a lot of different sources. Lenders don’t want to penalize you for earning money, but they do have to make note of any undocumented large deposits.
Depositing a handful of cash from the sale of a used vehicle or lottery winnings from hitting it big at the casino can be much more justifiable without a paper trail. If you decide to make a large deposit because you need the funds to cover your down payment or closing costs, make sure to provide a paper trail that sources the funds.
Without a paper trail there is no guarantee that the lender will qualify the funds for your transaction and you may not be able to get the loan because you won’t have enough verified cash to close.
Generally speaking, lenders look to verify any large deposit that is over 50% of the total qualifying income for your application, but that doesn’t mean they can’t or won’t verify smaller deposits that they feel warrant an explanation2.
Transfers between bank accounts, payroll deposits, or government benefits (such as social security) are generally permissible, because they have a clear explanation for their source.
1 National Association of Realtors. (2020, March 05). 2020 Home Buyers and Sellers Generational Trends Report (Rep.). Retrieved October 20, 2020, from National Association of Realtors website: https://www.nar.realtor/sites/default/files/documents/2020-generational-trends-report-03-05-2020.pdf
2 Freddie Mac Single-Family Seller/Servicer Guide. (n.d.). Retrieved October 20, 2020, from https://guide.freddiemac.com/app/guide/section/5501.3