Purchasing a new a home is an emotional and exciting time, making it tempting to want to mark the occasion in some special way. That could mean a celebratory bottle of champagne or a dinner with close friends and family, but ask a lender about celebratory mistakes first-time homebuyers made that caused delays at closing, terminated loans, and an inability for the buyer complete the home sale.
Don’t Apply for Another Loan
For Jacqueline Jones, director of mortgage lending for Business and Community Lenders of Texas, no example stands out clearer than a couple who decided they wanted something special to put in the driveway of their new home that couldn’t wait until after closing.
“I had a couple who’d found their dream home, and for some reason they wanted to have a brand new Mercedez-Benz in their garage when they bought their new home,” she said. “With that purchase they had another $693 monthly payment and weren’t able to purchase the home at that point.”
The car lovers committed a mistake all-too-common for new buyers by opening a new, large line of credit before finalizing their purchase. This new loan put them past the recommended debt-to-income threshold – generally held at 43 percent – and made it impossible to rebalance their finances in time to salvage the sale.
Jones and other lending professionals see expectant buyers who can’t say no to sales for new furniture or appliances before the big day. Their message to all future home shoppers: buy your furniture if you can afford them, but go shopping after closing so your lender won’t have to extend the loan processing period, or scrap the entire loan.
Even something as seemingly inconsequential as applying for a department store credit card with a $500 limit can tip things in the wrong direction.
“I tell them, don’t go out and buy anything and sign up for accounts once the credit has been pulled on the application,” Jones said. “You may need that new washer and dryer, but they can knock you completely out of a loan if it’s a really tight squeeze with your income.”
Don’t Make A Big Job Change
If you switch jobs during the loan review period, be sure to inform your loan officer ahead of time. Changes in employment aren’t a disqualifier during the loan review period, but you should mention any disruptions in payroll to keep the process moving as smoothly as possible.
Danielle Norris, a senior loan officer for First Centennial Mortgage, said the bigger problem on the job front comes when an applicant suddenly moves into a new field, or has a change in pay structure – such as switching to commission-based compensation from a salary or hourly arrangement.
“As long as you’re in same industry or doing something that’s a lateral move isn’t going to be a big deal,” Norris said. “If you’re doing something brand new that you’ve never done before it could show an underwriter that your stability could be shaky.”
Don’t Have Unexplained Fluctuations On Your Bank Statements
Major fluctuations on bank statements, even large deposits, can trigger red flags to lenders. Be sure to inform your loan officer about any incoming large deposits, but they typically can’t be used in calculating income on the loan application.
On the flip side, random large withdrawals or regular monthly payments to entities not reflected on a credit report can signal extra debt that needs to be figured into the debt-to-income ratio on the loan application.
“Having those big bumps or payments means that you’re doing something we don’t have an explanation for, and we have to source all of your down payment to make sure it is your money and that you haven’t borrowed the money from someone else to facilitate your down payment,” said Kimberly Watson, vice president of lending for South Star Bank Mortgage. “Large deposits and withdrawals throw up a red flag and necessitate more documentation, like a bill of sale from large sales for a car, or if the money was a wedding gift we need to verify that. I’ve also heard of crowdfunding for down payments, though I haven’t run into that myself yet.”
Don’t Close Out Lines Of Credit
This one goes against conventional wisdom, but Jones said that while paying off credit card debt is a positive step, canceling a card can remove years of good credit history from an application. That makes it harder for the loan officer to get the best terms possible if there’s not accompanying positive history from other well-maintained accounts.
Her advice: pay cards down so the balance is below 30 percent of the total limit, and possibly request an increase to the limit as another way to make the balance take up a smaller portion of total available credit.
“Keep the card and maybe buy $30 worth of gas to keep something on it, but don’t do anything to close the account until after you’re in the home,” Jones said.
Don’t Try To Hide Financial Bruises
The simple truth is that your loan officer is going will find debts and hits on your finances.
Letting your loan officer know your complete financial history from the start makes it easier for them to write a loan that matches your financial picture.
“Loan officers are there to help you and all that stuff is all going to come out anyways, so it’s better to know early so we can work on maybe paying off a small debt quickly to improve things,” Norris said. “Loan officers are only paid on commission if the loan closes, and we’re there to help you get the loan closed not to go through and spend a month on a loan that doesn’t close.”
Don’t Go In Unprepared
Watson said about 75 percent of the first-time buyers she sees need some kind of cleanup of their credit or more job history to make their application ready for a loan with terms they can afford. All three officers interviewed for this story said new buyers should consult a financial counselor – ideally on an ongoing basis instead of just once – to set their goals and learn good financial habits.
That takes time, but the payoff is building even better credit that will make an applicant more attractive for lenders and easier to underwrite.
“People get a job and pay their bills for six months and think they can buy a house now,” Watson said. “Six months is a start, but it’s not a history and we need to see a history that shows a pattern of behavior. Can you save, can you control yourself and pay your bills on time? Some people when they get good credit don’t know how to manage it and run it up.”