Mortgage Approval Process
Home buyers or homeowners seeking a residential mortgage loan has to go through the mortgage approval process. The mortgage approval process can be a smooth process as long as you avoid doing certain things that can cause a lot of red tape and stress. Mortgage loan underwriters will analyze your income, work, work history, credit, credit scores, recent credit inquiries, credit history, credit report, derogatories, late payments, late payment history, tax returns, bank statements, public records, and documents such as prior bankruptcy paperwork, foreclosure documents, and other personal and financial records. There are things that you need to avoid doing either prior or during the mortgage approval process.
Changing Jobs: Wait Until You Close On Your Loan
The mortgage approval process can take anywhere between 30 and 60 days. A change of jobs during the mortgage approval process can cause a mortgage loan denial or at best, a delay in closing the mortgage loan. I always tell mortgage loan borrowers about the severe consequences of changing jobs or quitting their job during the mortgage approval process. Unfortunately, people do change jobs during the mortgage approval process. If you got a conditional residential mortgage loan approval and have met all the conditions but quit your job prior to closing on your mortgage loan, your mortgage loan will get revoked. If you quit your job and start a different job in the same field and either the same pay or higher pay, your mortgage loan closing will get delayed.
Changing Jobs During Mortgage Process
Mortgage lenders will require a minimum of 30 days of pay check stub and a verification of employment from your new employer. There is no exception to this rule. Your mortgage loan will get delays a minimum of 30 days and in most cases, it is longer. If you quit your job and get a new job that pays less than your old job, your whole mortgage loan process will be delayed because the mortgage loan underwriter will need to re-qualify your income and debt to income ratios.
A job transfer from one location to another location within the same corporate umbrella will have no effect in the mortgage approval process as long as you make the same money.
Avoid Applying For New Credit
Credit inquiries will drop your credit scores by 2 to 5 points and it should be avoided during the mortgage approval process. Each credit inquiry on your credit report will need a letter of explanation. You should avoid applying for new credit, especially new credit cards, at least six month prior to applying for a mortgage loan and during the mortgage approval process. Mortgage loan borrowers may be tempted by furniture stores or other creditors offering them zero interest credit for a year if they get approved for the new credit they apply.
Credit Inquiries Require Letter Of Explanations
Applying for new credit during the mortgage approval process is a big mortgage mistake you will make because not only does it lower your credit scores, but your mortgage lender will do periodic credit checks and every inquiry will need a letter of explanation. If you apply for multiple credit cards, it may plummet your credit scores where your lowered credit scores will no longer qualify you for the mortgage loan. Your original credit score that was pulled originally by your mortgage lender expires in a certain amount of time and if that time expires, a new credit report needs to be pulled and if the new credit score falls below the minimum credit scores required, you will no longer qualify for the mortgage loan.
Never Close Out Active Credit Accounts
Many consumers close out credit cards they no longer use and try to limit the amount of credit cards they have. This is a major mistake because by doing this, it will affect your debt to credit limit ratios. Part of your credit scores is derived by the longevity of credit history and the amount of credit you have available. By cancelling or closing out credit cards with credit limits and no credit balances will wipe out a good credit tradeline and will lower your credit scores. For example, if you have had a ABC Bank Master Card for ten years with a credit limit of $5,000 and have a zero balance, this credit card is a great asset to your credit history and is part of you having a good credit score. Although you might have to pay a $50 annual fee and are not using it, do not close out credit card accounts that are active but you are not using.
Keep Credit Balances Low On Credit Cards
On the flipside, if you have credit cards, do not max out your credit cards either prior to or during the mortgage approval process. Having a maxed out credit card or credit cards will hurt your credit scores tremendously and will look bad under the mortgage underwriter’s eyes. For example, if you have several $1,000 credit limit credit cards and you have credit balances of $900 on each of those credit cards, your credit scores will be affected negatively and can potentially hurt your credit scores. Always keep your credit balance of no more than 25% of your credit card limit for the best credit optimization.
Never Purchase New Car Prior To Or During The Mortgage Approval Process
Having a car loan prior to the mortgage approval process is one of the worst mistakes you can make. An average new car monthly payment is $400.00 per month. Debt to income ratios is the amount of your total minimum monthly payments divided by your monthly gross income. A $400 monthly payment is equivalent to a $100,000 mortgage balance.
Car Payment Will Lower Your Home Buying Power
There are tons of home buyers who cannot purchase the home of their dreams because they have purchased a car two or three months before they started the mortgage approval process. If you need to purchase a new car and need a car loan, please wait until you close on your home purchase so you can have the maximum buying power. If you already have a car loan and want to trade in your car for a newer car, you can do it as long as your monthly car payment will be the same or your monthly payment will be lower than your current monthly car payment. You can get a more expensive car but if you do, extend the terms so your payments will be less than your current payment. Mortgage loan borrowers with higher debt to income ratios get higher mortgage rates than those with lower debt to income ratios.
Mortgage lenders will require two months bank statements and your bank statements will be carefully scrutinized by the mortgage loan underwriter. Mortgage lenders do not want to see any overdrafts and irregular deposits in your bank account. Make sure that you have overdraft protection on all of your bank accounts and do not have any overdrafts. One or two overdrafts might not be deal killers but multiple habitual overdrafts will be a sure mortgage loan denial. Overdrafts are viewed by mortgage lenders as financial irresponsibility. Many folks, especially business owners, do not mind paying the $35.00 overdraft fee to their bank but mortgage lenders view even a $5.00 overdraft as a serious credit risk. By all means, try to avoid overdrafts and make sure you get overdraft protection.
Another thing to avoid doing during the mortgage approval process is opening and/or closing bank accounts. Bank statements will be required by mortgage lenders and every irregular deposit needs to be sourced. For example, if you deposited a $5,000 check from a sale of your car and that $5,000 will be used towards the down payment of your home, then that money needs to be sourced. A copy of your title, the bill of sale, copy of the check, and the deposit slip will be required by the mortgage loan underwriter in sourcing the $5,000. If you are planning on getting a gift for the down payment, a gift letter will be required by the donor and the money leaving the donor’s account into your account will need to be provided along with 30 day’s bank statement of the donor showing the gift funds being seasoned.
Large And Irregular Deposits
If you have cash and make a substantial cash deposit into your bank account and that cash cannot be sourced, you cannot use those funds as a source for your down payment. If you want to avoid sourcing the funds, whether the gift funds or cash funds, you need to deposit the funds into your bank account and have it seasoned for at least 60 days. Remember that the mortgage lender will only require 60 days bank statements so anything prior to that will not be required to be shown. If you have undocumented cash or funds and cannot source it, I strongly recommend that you deposit it to your bank account and season it for two months prior to the mortgage approval process.
By Gustan Cho