Things To Avoid During Loan Process In Order To Close On Time

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Things To Avoid During Loan Process In Order To Close On Time

This BLOG On Things To Avoid During Loan Process In Order To Close On Time Was UPDATED On February 27th, 2018

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 borrowers abide by things to avoid during loan process that can cause a lot of red tape and stress
  • Mortgage loan underwriters will analyze the following:
    • income
    • work
    • work history
    • credit
    • credit scores
    • recent credit inquiries
    • credit history
    • credit report
    • derogatory
    • late payments
    • late payment history
    • tax returns
    • bank statements
    • public records
    • documents such as
      • prior bankruptcy paperwork
      • foreclosure documents
      • other personal and financial records

There are Things To Avoid During Loan Process either prior or during the mortgage approval process.

Things To Avoid During Loan Process Is Changing Jobs

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 
  • I always advise borrowers about the severe consequences of changing jobs or quitting their job during the mortgage process
  • Unfortunately, people do change jobs during the loan process
  • Borrowers with conditional mortgage loan approval and have met all the conditions but quit job prior to closing on mortgage loan, mortgage approval can be in jeopardy 
  • Borrowers who quit job and start a different job in the same field and either the same pay or higher pay, 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 new employer when changing jobs:

  • There is no exception to this rule
  • Loan will get delayed a minimum of 30 days and in most cases, longer
  • Borrowers who quit their jobs and get a new job that pays less than old job, whole mortgage loan process will be delayed
  • This is because the mortgage underwriter will need to re-qualify 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 borrowers make the same money.

Applying For New Credit Are Things To Avoid During Loan Process

Credit inquiries will drop credit scores by 2 to 5 points. Applying for new credit is one of the things to avoid during loan process

  • Each credit inquiry on credit report will need a letter of explanation
  • Borrowers should avoid applying for new credit
  • Especially new credit cards, at least six month prior to applying for a mortgage and during the home loan process
  • 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 borrowers make. This is because not only does it lower credit scores, but mortgage lender will do periodic soft pull and every inquiry will need a letter of explanation.

  • Consumers who apply for multiple credit cards, it may plummet credit scores where lowered credit scores will no longer qualify borrowers for loan
  • Original credit score that was pulled originally by mortgage lender expires in 120 days
  • A new credit report needs to be pulled and if the new credit score falls below the minimum credit scores required, borrowers will no longer qualify for the mortgage

Never Close Out Active Credit Accounts

Many consumers close out credit cards they no longer use. They try to limit the amount of credit cards they have.  This is a major mistake because by doing this, it will affect debt to credit limit ratios.

  • Part of credit scores is derived by the longevity of credit history
  • The amount of credit consumers has available
  • By cancelling or closing out credit cards with credit limits and no available credit balances will wipe out a good credit tradeline and will lower credit scores
  • For example, lets have a case scenario:
    • Consumer has ABC Bank Master Card for ten years
    • Credit limit of $5,000 and have a zero balance
    • This credit card is a great asset to borrowers credit profile and is part of having a good credit score
  • Although consumers might have to pay a $50 annual fee and are not using it, do not close out credit card accounts that are active and are not using

Keep Credit Balances Low On Credit Cards

On the flipside, if borrowers have credit cards, do not max out credit cards either prior to or during the mortgage approval process.

  • Having a maxed out credit card or credit cards will hurt credit scores tremendously
  • It will look bad under the mortgage underwriter’s eyes
  • For example, consumers with several $1,000 credit limit credit cards and have credit balances of $900 on each of those credit cards, credit scores will be affected negatively
  • This will hurt credit scores
  • Always keep credit balance of no more than 10% of credit limit for the best score optimization

Never Purchase New Car Prior To Or During Loan Process

Having a car loan prior to the mortgage approval process is one of the worst mistakes borrowers can make.

  • An average new car monthly payment is $400.00 per month
  • Debt to income ratios is the amount of total minimum monthly payments divided by monthly gross income
  • A $400 monthly payment is equivalent to a $80,000 mortgage balance

Car Payment Will Lower 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 process.

  • If borrowers need to purchase a new car and need a car loan, please wait until closing on home purchase to maximize buying power
  • Those who already have a car loan and want to trade in car for a newer car, they can do it as long as monthly car payment will be the same or monthly payment will be lower than current monthly car payment
  • Borrowers can get a more expensive car but if they do, extend the terms so payments will be less than current payment
  • Borrowers with higher debt to income ratios get higher mortgage rates than those with lower debt to income ratios

Bank Statements

Lenders will require two months bank statements. Bank statements will be carefully scrutinized by underwriters:

  • Lnders do not want to see any overdrafts and irregular deposits in bank account
  • Make sure to have overdraft protection on all of bank accounts
  • Do not have any overdrafts
  • One or two overdrafts might not be deal killers
  • But multiple habitual overdrafts can be grounds for 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 for overdrafts and use it as cost of doing business
  • But most underwriters view even a $5.00 overdraft as a serious credit risk
  • By all means, try to avoid overdrafts and make sure to get overdraft protection

Banks Accounts In Loan Process

Another thing to avoid doing during the mortgage process is opening and/or closing bank accounts.  Bank statements will be required by underwriters and every irregular deposit needs to be sourced.

  • For example, case scenario:
    • deposited a $5,000 check from a sale of car
    • $5,000 will be used towards the down payment of home
    • That money needs to be sourced
  • The following will be required:
    • copy of title
    • bill of sale
    • copy of the check
    • deposit slip will be required by underwriter in sourcing the $5,000
  • Borrowers planning on getting a gift for the down payment, a gift letter will be required by the donor
  • The money leaving the donor’s account into borrowers account will need to be provided
  • 30 day’s bank statement of the donor showing the gift funds being seasoned must be provided

Large And Irregular Deposits

Borrowers with cash and make a substantial cash deposit into bank account and that cash cannot be sourced cannot use those funds as a source for down payment.

  • Borrowers who want to avoid sourcing the funds, whether the gift funds or cash funds, borrowers need to deposit the funds in their bank account and have it seasoned for at least 60 days
  • Remember that the mortgage lender will only require 60 days bank statements
  • Anything prior to that will not be required to be shown
  • Borrowers with undocumented cash or funds and cannot source it, I strongly recommend they deposit it to bank account and season it for two months prior to the mortgage approval process

Home Buyers who need to qualify for mortgage with direct lender with no mortgage overlays can contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com.

By Gustan Cho

www.gustancho.com

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