The 4 Worst Things You Can Do Before Getting a Mortgage to Buy a Home
Applying for a mortgage involves lots of moving pieces, such as saving for the down payment, making sure your credit score is high and proving you can afford the monthly payments on top of any other outstanding debts.
You want to present the best picture possible to the mortgage lender showing that you are a trustworthy borrower, and keep it that way until your mortgage closes.
Even getting preapproved for a mortgage doesn’t guarantee you will receive the mortgage loan. Therefore, it’s important to avoid these five things before buying a home.
New Credit Inquiries
Every time you apply for new credit, those inquiries are placed on your credit report. To many inquiries, especially when you’re waiting to close a mortgage, could not only impact your credit score, but also your standing as a good borrower.
That means: Don’t go shopping for a car and let the dealership pull your credit to see if you qualify for a loan. Even if you don’t buy the car, the credit inquiries can hurt you.
“Small inquiries don't hurt, but many in a short time can,” said Lyle Solomon, principal attorney at Oak View Law Group in Rocklin, California. “Too many inquiries can make you a high-risk borrower, hurting your home-buying chances.”
» Expert Tip: Looking to buy soon? Set yourself up for having your offer accepted on a home by getting preapproved for a mortgage prior to your home search.
Late Payments on Bills
It’s imperative to stay current on all of your bills, including all loans and credit cards – especially when waiting to close a loan for what is likely to be the largest financial transaction your family ever makes. Before closing your mortgage, lenders typically re-check your credit score.
Payment history accounts for about 35% of your credit score, according to Wells Fargo. And, the amount of debt you owe accounts for another 30% of your score.
“Having unpaid bills can have a harmful impact on your credit score,” Solomon said. “When you miss a payment, it can have a negative impact on your credit score. This negative point can cause lenders to drop your application.”
Co-Signing a Loan
In addition to influencing your credit score, adding to your debt while waiting to sign a mortgage could change the debt-to-income ratio, or DTI, lenders use to qualify borrowers. Your DTI is calculated by adding up all of your monthly debt payments and dividing that total by your gross monthly income to determine your ability to repay the loan.
Co-signing a loan, even if you won’t be the one to repay the loan, will affect your status with the mortgage lender.
“The decision to co-sign a loan is risky from a standpoint, but it's especially harmful when applying for a mortgage loan,” Solomon said. “Having this status means you are legally responsible for another person's debt.”
While the person you co-sign with could be the most dependable person you know, lenders will still evaluate your ability to repay based on your total monthly obligations, including the new one.
“If you continue to rack up debt, the proportion of your debts to your income and the value of your assets may soon become unmanageable,” Solomon said.
Be careful when considering taking a new job or even a promotion while applying for a home loan. Those changes may look good on the surface, but lenders usually look a little deeper to see how that job change could affect your ability to make your monthly mortgage payments.
“Mortgage lenders look for candidates with stable jobs who are not constantly job-hopping,” Solomon said. “Lenders may put the brakes on your loan application if you switch careers, or if you move up in the company, but your pay is now entirely or primarily based on commission.”
Even if the new job increases your income, lenders may not look at it that way. So, wait until the mortgage closes to accept a new position.
» Expert Tip: Thinking about buying a home but want to secure a good rate? Find a lender that gives you the power to lock an interest rate for an extended period so you can shop around for a home comfortably knowing that your rate is secure and won't go up. Get started here!