Homeowners account for more than 65.5% of all American households, which means people are continuing to buy homes at a much higher rate than renting them. The reasons behind this may vary, but a report by the National Association of Realtors states that 27% of buyers simply want to have their own home.
If you’re looking to buy your first home or refinance your current home because of low rates, you’ll have to go through a home loan process. Determining how to get a loan that’s best for your situation can take time and often involves comparing the best mortgage lenders to see what loan terms are available. Once you’ve picked a lender to work with, you’ll need to submit a mortgage loan application and then wait to see whether you’re approved.
Sometimes it can feel like the stress of applying for a loan is alleviated once you turn in your application. But there are important things to avoid doing that can accidentally sabotage your approval odds — and you’re probably not aware of all of them.
Throughout the entire loan process and especially while waiting for your approval, you’ll want to avoid doing these 13 things.
Don’t quit or switch your job
Although it can be difficult to plan when you need to quit or switch your job, it’s in your best interests to put off this action until after you’ve qualified for a mortgage loan. Changes in your income and work history can significantly impact whether you qualify for a loan because lenders want to see a sufficient stream of income and a steady work history.
Home loans often have terms of 15 or 30 years, so if you show a lender any risk of not being able to pay back the loan amount and interest during that time frame, you’re likely to be denied. If you know you’re applying for a home loan soon, be sure to plan ahead and keep your job situation in check so you can qualify for the best loans.
Don’t buy a car
Making a large purchase like a car isn’t a good decision if you’re going through the home loan process. That’s because mortgage lenders will check your debt-to-income ratio.
Cars can cost a lot of money, so most people have to take out a loan to buy a new vehicle. Because your debt-to-income ratio is a comparison of how much money you earn versus how much money you spend on mandatory expenses, a monthly payment on an auto loan will increase your overall debt-to-income ratio. This could make your financial situation look like a higher risk to lenders.
You typically wouldn’t want to get auto or home loans within a short amount of time of each other because either one could easily affect your chances of getting approved for the other.
Don’t go crazy with your credit cards
Certain loans require a minimum credit score for approval, which means you shouldn’t get out of hand with your credit card purchases while searching for a home loan.
That’s because your credit score can take a hit if your credit utilization gets too high. Your credit utilization ratio is how much available credit line you have versus how much of that credit line you’ve already used up.
If you’re excited about being in a new home, it can be tempting to start the furniture and home decor purchases early, and credit cards can make that convenient. But it’s better to wait until you know the mortgage is approved before furnishing your new home.
Don’t change banks
To understand the role of a mortgage lender in the loan process, think about the type of person you’d want to lend some of your money to. Lenders weigh a variety of factors when determining whether they should approve your mortgage, which is the same thing most regular people do when deciding whether someone can borrow money from them.
One of the biggest deciding factors in the loan process is looking at the financial history of an individual, which includes their banking history. If you have a friend or family member with a good history of borrowing and paying back money, you’re more likely to lend them money.
Mortgage lenders feel the same way, which is why you shouldn’t change your banking relationships during the loan process because it disrupts your banking history and is a potential warning sign for lenders.
Don’t apply for any new credit cards
It’s best to avoid putting a lot of spend on your credit cards while applying for a home loan and it’s also a good idea to stop applying for any new credit cards too.
New lines of credit can affect your credit score and can also represent potential debt to lenders investigating your financial history. The more possible debt you have, the less likely you’ll be approved for a new loan.
Don’t ignore questions from your lender
Your credit, income, and other financial information are laid bare for lenders to look over when they’re deciding whether you qualify for a mortgage. Lenders may have questions throughout the process that require some clarification on your end. If you get any questions from the lender, be sure to answer them promptly and with the exact information requested.
If you ignore questions from your lender or don’t provide the needed information, you could risk being denied the loan or delaying the loan process. To keep everything smooth with your mortgage, be responsive and informative when needed.
Don’t co-sign on any loans
Getting any other loan during your mortgage process can affect your outcome of qualifying for your home loan. It makes sense to make yourself available to help your friends and family if they need a co-signer on a loan, but you should worry about your own loan first. That’s because even if you won’t be the one making the payments on another loan, you’re still responsible for the entire loan as a co-signer.
So let your friends and family know you won’t be able to help them until your mortgage process is over. Otherwise, your potential mortgage lender will see you’re a co-signer on another loan and that you’re responsible for the amount of debt involved with it. This could severely hamper your opportunities to qualify for mortgages with quality rates.
Don’t let anyone run a credit check
Credit checks are a common way for companies to see whether you’re financially responsible enough to borrow money from them or use their services. You may experience a hard credit check when you apply for a new credit card or loan and possibly when you sign up for services like cable TV or internet.
Your credit score can be affected by how many checks you’ve had run on you in a short period of time, so it’s essential to avoid having anyone run your credit while you’re in the middle of applying for a new mortgage. Lenders don’t want to see too many recent checks because it can look like you’re trying to open up a lot of lines of credit or loans all at once.
Don’t miss any payments
You always want to make sure you don’t miss payments on any loans or other debt, but it’s especially important to keep on top of payments when applying for a loan as big as a mortgage. Missed or late payments are a big red flag for lenders because it shows a risk of you potentially missing or making late payments to them if they loan you money. And why would someone want to give you a home loan if you’re missing payments on other loans?
Don’t close any accounts
The average length of all your credit history is an important factor in your credit score. So closing any type of credit account effectively ends the history on that product and can negatively impact your credit.
For example, you may decide to cancel a credit card because you don’t want to pay its annual fee. But instead of closing the card and ending its credit history, you could see if there’s an option to change to a different credit card product from the same issuer that doesn’t have an annual fee. This will continue the life of the original product and preserve its credit history so your credit doesn’t take a hit.
Product changing a credit card will also keep your total available credit at the same amount so your credit utilization won’t change. If you closed a card, you’d lose its available credit and you’d end up with a higher chance of going above the recommended credit utilization ratio. This could cause your credit score to go down and reflect poorly on your credit report.
Don’t make large deposits to your bank accounts
If you don’t typically have large deposits going into your bank accounts on a regular basis each month, don’t suddenly make a few during the mortgage process. The loan company you’re working with wants to see your normal income and debt, so anything out of the ordinary could be a red flag for the underwriter on your mortgage.
Although it may not be uncommon to receive financial help from family members for a down payment on a home, any gifted money should be planned out and received well ahead of time. Also, the financial institution you’re working with should be informed of any cash gifts you receive. This is typically done by having your friend or family member fill out a gift letter that states the money is a gift and not a loan.
Don’t make payments on old collections accounts
As time goes by, the old debts you owe will typically affect your credit less and less, but it’s still not a bad idea to pay off old debts just to have a clean slate and perhaps because you simply feel it’s the right thing to do.
But if you don’t want to mess with your mortgage approval, you’ll want to wait to pay off old debts until after the process is done. Making a payment on an old collections debt without completely paying off the debt can refresh it on your credit history and have a big impact on your credit score. This could in turn affect your eligibility to be approved for your mortgage.
Don’t be afraid to ask questions
There’s nothing wrong with asking questions during the mortgage approval process. You’re potentially signing up to borrow a huge amount of money for your future home, so feel free to ask your loan officer any mortgage questions you have when it comes to things you don’t understand or that you want to understand more deeply.
Your loan officer needs to know about your financial situation and it’s only fair you should know how the loan process works. If nothing else, asking your questions will lessen the stress of the situation so you can be more excited about being a homeowner or getting a better mortgage rate.
Getting approved for a mortgage is a big deal, but it can take a lot of time and preparation to get yourself into a situation where it’s possible. To make it easier on yourself, remember to avoid the things we’ve touched on in this article, including doing anything that could decrease your credit score or appear as a red flag to mortgage lenders.
If you can stick to these guidelines and practice good credit-building habits, you’ll place yourself in a great position to qualify and get approved for the home loan you want.
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