Shopping for a home loan? Don’t let these minor errors throw a kink in your mortgage application.
You’ve found the house of your dreams and are ready to apply for a mortgage but are you really ready to be a home owner or are there some detours that need to be ironed out first in order to be a homeowner.
Before you start picking out new paint, furniture and designing the kids bedrooms, you need to make sure that you’re mortgage financing will get approved. Today’s mortgage application process can be complex, and there are some surprising issues that can spring up and cause your application to land in the rejection pile.
“Guidelines can be challenging and borrowers need to be prepared prior to making any big decisions that may jeopardize their chances of getting into a home,” says Ben Gerritsen, owner of Miracles Happen, a mortgage company in Ogden, Utah. “In the past, lending was much more lenient. This set up many borrowers for failure. But, any time you have homebuyer education, planning, and solid lending, that is a good thing.”
We’re here to help with the education and planning part. So, if you’re applying for a home loan, read on for some unexpected issues that could derail your home buying experience and how to avoid them.
Paying your credit card on time: It’s such a simple concept, but sometimes easier said than done. And while missing a $5 credit card payment may seem like a minor misstep, it can actually lower your credit score and effect your mortgage application, according to Gerritsen. You can miss a maximum of 1 payment in the past 12 months in order to get a loan. More than one late you will be relegated to having to wait 12 months to get any financing at all.
“It does not matter if you are late by $1 or for $50,000, a late payment is a late,” says Gerritsen. “The score is calculated by several factors, one of which is being over 30 days late on revolving or installment accounts.”
Gerritsen says a late payment can cause your score to drop your credit score to where it will put you in a lower tiered credit scoring bracket. For example, if you fall below the magic credit score number (680 is good but 720 or higher will get you better terms). The lower your score you won’t get as good of terms. And if you have more than one 30 day late, you will be sitting on the side lines for at least 12 months from the date of your last late or until you have only one late in the past 12 calendar months.” says Gerritsen.
People need to pay attention to when their bills are due, set up auto payments, write down As for avoiding this kind of rejection, Gerritsen advocates being vigilant about paying all installment and revolving accounts on time or at least within 30 days of the due date.
“Once you are over 30 days late, it will be reported,” he says. “The only ethical way to get it removed is if it was an error and the creditor is willing to remove.
So make sure to look at your due dates carefully and make payments on time – even on a minimal amount of money.
If you’re in the middle of the mortgage application process, you might want to think twice about gifting or lending anyone money – no matter how small the amount.
It may sound crazy, but even a small loan or donation, say $100 to a friend or family member, could put a wrinkle in your home buying plans. Why? Because if you need that money to be accounted for in your cash to close from your bank account. This may not be the case for many, but for some home buyers, this may hold up being able to have sufficient funds that are needed to close.
Gerritsen also advises against making large purchases during the approval processes, as they can also disqualify clients for loans.
The funds needed in your bank account is not your current balance, but rather the ending balance for the past 2 months averaged out. Underwriting goes off of the ending balance in a checking or savings account. By lowering the ending balance in a bank account to a lower amount than the required cash to close can cause a transaction to be denied or postponed to a later time.
By not incurring any new large ticket items, new debt or parting with funds that are required for the transaction is key to getting financing approved,” says Gerritsen. “I always have this talk with my clients and warn them not to buy any big ticket items before or during they purchase their home.”
The bottom line here is to hold off on those splurge purchases to stay on the safe side, and be sure you’ve got a nice cushion in your bank account even for small gifts and loans for friends and family.
Getting a new job should be celebrated, right? Well, according to Gerritsen, employment stability is a key component in qualifying for a mortgage.
If you look like someone who is wishy-washy about their career and jumps from one industry to the next, what does that say about your maturity level and discipline? Gerritsen says it isn’t uncommon for lenders to correlate job instability with irresponsibility. And if lenders can’t trust that you can handle paying back their loan, rejection is a potential reality.
“If you start a new job during the process, lenders will most likely want to see that you have earned at least 30 days of income prior to closing,” says Gerritsen. “They will also evaluate if this is a similar field for you, or if you are moving to a different field. They prefer to see this as a positive move in your career.”
Earning more money, securing a better position, and staying in a similar field are all positives that won’t have an adverse effect on your mortgage application, he says.
As another piece of advice, Gerritsen recommends that anyone who earns a majority of their salary through sales commission or overtime to present a longer salary history when applying. “Be careful to note that if you earn a large part of your income as commission or overtime, in many cases you need a two-year history to use that income to qualify,” he says. “If that is a new job, only the base income will be used.”
In some cases we may only require a one year history of being self employed, but not in all cases. We have to get an automated approval from the system along with the individual that is self-employed or commissioned income would need to have a history in the same industry prior to being commissioned or self-employed.
How else can you avoid denial around the issue of your employment? “When possible, start a new job at least 30 days prior to your mortgage application,” says Gerritsen. “If this happens during the process, alert the mortgage lender as soon as possible so you can evaluate how long the closing date will need to be postponed before your income is considered stable.”
You read it right. Closing even one credit card can reduce the total amount of credit to your name. The underwriting systems take your credit credentials into consideration when deciding whether or not to approve your loan.
“Length of credit history and how much available credit you have are two key components in determining a positive credit score,” says Gerritsen, who noted the target range of 680 to 720 above. “If you close credit cards that are older or have large available lending balances, you will reduce your credit score.” And that can jeopardize whether or not your loan is granted, if you don’t hit the magic number.
Gerritsen offers the following scenario as an example: “You may have a great credit score because it shows you have that particular card for the last 15 years, and it has a $10,000 credit line that you are not using,” he says. “Once you close it, you have a double negative. Lack of credit available, and your oldest card is gone.”
More importantly, you also lose the entire positive payment history associated with the card, which can be reflected in a lowering of your credit score and potential application denial. Thus, Gerritsen says to tread lightly before making this move. In fact, if you do not want to use the credit cards or loan and they are not incurring any fees, Gerritsen suggests just cutting up the plastic once they are issued but you MUST keep the account open. Do Not Close accounts as this will only be bad for your credit health, it lowers your scores.
If you happen to have closed a card during the application process before knowing about this adverse effect on your credit score, Gerritsen says not to counteract the move by applying for a new credit card. “The inquiries will lower your score further,” he says, which again could jeopardize your ability to secure a loan even further.
Are you stashing a stack of bills under your mattress, in the couch cushions, or in the freezer? If you’re planning to use some of this money as a down payment on your new home, there’s a chance your mortgage application may be rejected.
“This is not a little thing, but sometimes ‘large deposits’ can really become a big problem,” says Gerritsen. For example, say a borrower keeps approximately $4,500 in cash in their room for whatever reason, and then he deposits the cash for the mortgage application process and transaction. Unfortunately, “Now the funds are not seasoned, and we cannot use them for the transaction,” says Gerritsen. “This can really be the difference between having enough money to close and not,” he says.
In order to avoid this kind of a dilemma, Gerritsen says any funds that are used in a real estate transaction need to be in your account for two (2) bank statement cycles prior to getting a loan.
“Depositing the funds prior to two (2) bank statement cycles will allow them to be seasoned and not become a problem later,” he says. “This is why a consult early in the process can spot potential problems later.”[shareaholic app="share_buttons" id="27157108"]