You did it! You’re finally ready to apply for a mortgage or have gotten pre-approved. While this understandably provides a sense of relief, it’s not a done deal until you sign your closing papers. Whether you’re buying a new home or refinancing your current one, there are certain things you can do that could give the underwriter the impression that you will not repay your loan and could jeopardize your loan status.
With that in mind, here are six things you should never do right before or after you apply for a mortgage:
1. DON’T: Make large deposits or withdrawals.
Part of the mortgage application process includes providing recent bank statements. Anything out of the ordinary, including large deposits or withdrawals, can raise a red flag. If you’ve received a gift for your down payment, make sure you discuss how to document it with your mortgage officer at the time you apply. It’s not a deal-breaker in getting your mortgage application approved, but the source of the funds and the nature of the deposit needs to be discussed to avoid problems with processing your application.
2. DON’T: Change jobs.
Proof of a steady income, especially in the same industry, is one of the most important aspects of a mortgage approval. Avoid switching jobs until your loan has closed, if at all possible. If you must switch jobs, be sure your new job is in the same industry as your old one.
3. DON’T: Make large purchases on credit.
While it can be tempting to want to furnish your new home or park a brand new car in your new driveway, avoid making any large purchases on credit. This raises your DTI. It also adds inquiries to your credit report, which can lower your score and raise a red flag to lenders.
You can, however, continue to use your credit as normal. Make small purchases and pay them off, if possible, to continue to show that your debt to income ratio is stable and your spending is in control.
4. DON’T: Run up a home equity line of credit.
A home equity line of credit works like a credit card, and many of the same rules apply. Making purchases on your home equity line of credit affects your debt to income ratio, or DTI. Plus, it can indicate to a lender you are relying too much on credit. You shouldn’t rely on credit when you apply for a mortgage. Show the lender that you have enough income to live on the money you make– not the credit cards or lines of credit you have.
5. DON’T: Close credit accounts.
Don’t close any of your credit accounts, even if you no longer use or need them. Closing your accounts sets off a chain reaction, reducing your available credit, raising your debt to income (DTI) ratio, and potentially putting your loan at risk. While it may sound like a great idea to close the credit accounts that you are not currently using, it can cause mortgage application problems if you are not careful.
6. DON’T: Make payments on collection accounts.
If you make payments on an old collection account, the account is considered “current.” This can actually drop your credit score and hurt your chances of getting approved. In addition, making payments on old collections can revive their collection status, as a creditor is only able to pursue you for payment for 7-10 years from the date of the last payment that was made (depending on the state in which you live). Making a payment on a collection account can revive it from the “dead,” so to speak, and you could be on the hook for it for many years to come. If it is nearing the 7-10 year mark, sometimes it’s best to just let it be so that it’ll fall quietly off your credit report.
When applying for a mortgage loan, even seemingly minor actions can affect your chances of getting approved. If you have any questions about the dos and don’ts of a mortgage application, call one of NLC Loans’ personal mortgage advisors toll-free today at 1-877-480-8050.