If you have worked hard to overcome your past credit problems in order to purchase a home it can be a huge relief when you finally receive that pre-approval letter from your mortgage loan officer. A pre-approval is your next big step toward purchasing the home you have been dreaming about, but it is not a golden ticket either.
Once you are pre-approved for a mortgage the next step is generally verification (aka underwriting). You will be required to supply a number of documents to your lender in order to verify your income, employment history, and other information which is relevant to your loan. Assuming that you are able to pass successfully through the verification process your loan status should move from “pre-approved” to “approved.”
Yet just because a lender has issued you a pre-approval does not mean you are guaranteed financing. There are still a number of ways to mess up your loan before your closing date rolls around. Keep reading for a list of ways to mess up your mortgage approval. Hopefully you will be able to learn from the mistakes of others so that you never have to find yourself in the same unfortunate situation.
Apply for or Open New Accounts
Even though your credit was checked as part of the pre-approval process, your lender is most likely going to check your credit report again prior to closing. They do this in order to be sure you have not experienced a change in “borrower circumstances.” If credit or financial changes occur between pre-approval and closing (such as a drop in your credit scores) then you could lose your loan.
Applying for or especially opening new accounts is one potential way to kill your mortgage before you ever make it to the closing table. When you open a new credit obligation while your mortgage loan is in underwriting, especially a large obligation like an auto loan, you could raise your debt to income ratio as well. An increase in your debt to income ratio could financially disqualify you from closing on your loan even if your credit scores are not an issue.
Run Up Your Credit Card Balances
Another potential way to mess up your mortgage closing is to run up your credit card balances. As is the case with opening new accounts, when you run up higher balances on your credit cards you have the potential to both raise your debt to income and to lower your credit scores simultaneously. You may not realize it, but your credit card balances have a big influence over your credit scores. As your credit card balances climb your credit scores will generally begin to fall – sometimes significantly. In fact, your credit card balances can have a negative impact upon your credit scores even if you keep your accounts paid on time each and every month.
Close a Credit Card Account
When you close a current, positive credit card account that action has the potential to drive your credit scores downward. Closing a credit card does not cause you to lose credit for the age of the account (that is a myth), but a freshly closed account can increase your debt to income ratio. When your debt to income ratio increases, your credit scores will most likely be impacted negatively. If your credit scores fall because of a credit card closure then there is a chance you may no longer qualify for the mortgage you had been approved for previously.
Pay Off a Collection
You would think that paying off old collection accounts is a positive move when it comes to your credit scores. However, due to a deficiency in some of the older FICO credit scoring models which are used by mortgage lenders, paying off an old collection can sometimes be interpreted as new derogatory activity. As a result, there are instances when paying off an old collection account could actually have a negative impact upon your FICO credit scores. Even if that impact is only temporary those newly lowered credit scores could be enough to cheat you out of your home loan.
Of course you should not assume that paying legitimate old collections is necessarily a bad idea. However, if you were already approved for a mortgage with those old collections present on your credit reports then you might want to consider waiting until after your home closing before paying or settling any old accounts.
Make Late Payments
Making late payments on any of your credit obligations while your mortgage is in the underwriting process is a huge mistake, a mistake which could easily put the brakes on your home loan.
A late payment could potentially cost you up to 50 points per credit bureau. At best, your closing date could be pushed, at worst, you no longer qualify for your loan.
Report your gross income, not your net income
While this doesn’t happen often, it does happen. Make sure when you enter your income on the application, you enter your gross income. This will go into the calculation for your debt-to-income ratio and if it isn’t entered correctly will not show the whole picture.
Document all the ways you earn money
Often people just submit a W2 form showing their annual salary, but if your debt-to-income ratio is too high, the lender will have to go back and ask you for more—such as documentation of 401k, IRA, stocks and bonds. Submit everything. More information is better.
Prepare to explain big deposits in your bank account
Banks will scrutinize your checking account history for the past two months. You’ll need to produce a paper trail for any out-of-the-ordinary, large amounts of money deposited into your bank account, such as the check your parents gave you to help with the down payment or the time your boss finally reimbursed you for that business trip. In the latter case, for instance, you might be asked to submit a copy of your expense report and evidence of your credit card payments for the expenses. Many times, a borrower has a very kind and generous family member who is excited to help them get in to a home. This kind hearted person reaches in to the old cigar tin under the mattress and pulls out a couple thousand dollars of cash to give to their favorite loved one
The borrower, all excited about now having the cash to put in the new kitchen or bathroom, puts the money in their account a few days before the closing. As with all loans, the lender will ask for updated assets, or as such bank statements to ensure the borrower has the cash to close. The underwriter will see this large deposit and ask for it to be sourced. Meaning, we have to prove where the money came from. We have to prove this to meet government requirements of insuring that the lender is not funding terrorism or laundering money. All deposits must have a paper trail of their source of origination. A note from Uncle Ernie will not do.
Just because your 3 credit reports and scores were checked by your lender prior to receiving your initial pre-approval does not guarantee you the money in hand to purchase your home. Yet if you can avoid the 5 mistakes above you should have little to worry about, at least from a credit perspective.