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12 Things Homebuyers Must Avoid Doing Once PreApproved



(Twelve things homebuyers must absolutely avoid doing once preapproved for a mortgage and continue avoiding until after you close on your dream home.)

Buyers waiting to close on a property with a mortgage should avoid doing anything that might change their credit picture until after the documents are signed and the money is delivered.

Just because you have a fully executed contract does not mean that closing successfully is a given, ESPECIALLY if you do things that will have a negative impact.  Here are the things you need to AVOID or at least WAIT until AFTER you close on your dream property...


1. Don't buy a new car or make other major purchases, such as furniture and/or appliances for your new home.

In other words, don't increase your debts.  This includes purchases for layaways.  The problem is it will change your debt-to-income ratio upon which your mortgage acceptance was based.  (Most lenders say your total debt-to-income ratio can be no more than 43%, and prefer no more than 28% for your house payment portion.)

2. Don't change jobs.    

With a new job you now have no track record, income history (pay stubs, etc.)  It will derail your mortgage or at least delay it.  (From my experience, it usually ended it.)

Borrowers should also be aware that lenders now routinely reverify their employment status just before closing. Borrowers cannot expect to hide a job loss or change of employment from their lender.  A borrower should immediately alert his or her loan officer of any change in job status. Further, if a borrower’s employer is being bought out and/or merged into another company, the company name will no longer match the name on the borrower’s loan application, that, too, should be reported to the lender in order to avoid delays at closing time.

3. Don't apply for a new credit card or credit of any type.

A credit inquiry will hit your credit report and lower your credit score.  If you are approved for the card, the lender will worry that you will spend you new credit limt and increase risk of defaulting on your loan.  It effects your debt-to-income ratio.  (Abuse of this extra credit is a common cause of foreclosures.)      Remember your credit is monitored, right up to the day you sign the closing documents.

4. Don't cancel a credit card account, ESPECIALLY if it has a long transaction history of good credit.  

Your credit score is possibly based in large part on that good credit history...removing it will likely LOWER your credit score.   If not using it, just set the card aside, cut it up if you must; just do not cancel the line of credit you have with that credit card.    It can affect your ratio of debt to available credit which has a 30% impact on your credit score.

If you cancel one or more cards because you're consolidating your debt - it may change your ratio of debt to available credit. Likewise, you want to keep active any beneficial credit history on your record.

5. Don't max out or over charge existing credit cards.

Running up your credit cards is the fastest way to bring your score down and it could drop up to 100 points overnight. Once you are engaged in the loan process, try to keep your credit cards below 30% of the available limit.  [1]

6. Do not increase the credit limits on your cards.

Many borrowers are confused about how lenders treat credit card debt, and mistakenly believe that it’s your credit card balance that counts. “Lenders view you credit limit as a possible debt level in the future, regardless of whether or not you pay your credit card off on a monthly basis, so the lenders will look at a credit card limit and assess the minimum payment at either 2%-3% of the total limit. [2]

Since card issuers will check your credit report when you ask for a credit line increase, this request may have an impact on your credit score. Card issuers can perform what is called either a “soft pull” or a “hard pull” depending on the issuer and the amount of additional credit requested. While a soft pull has no impact on your credit scores, multiple hard pulls within a short period of time are seen as multiple requests for new credit, which can hurt credit scores. Therefore, you will want to avoid requesting credit limit increases before applying for a more important loan, such as a car loan or a mortgage.  [3]

7. Do not co-sign on a loan.

It means you're financially responsible (liable) for someone's else's debt and it could adversely effect your debt-to-income ratio and assets.

8. Do whatever is possible to keep up with your payments for credit cards, rent, loans, etc.  

Failure to do so will lower your credit rating and jepordize your mortgage.

9. Don't spend whatever savings you had when you were approved for a mortgage, i.e., make sure you don't spend it!

This includes CHECKING accounts, savings accounts and any account you reported to the mortgage company that have cash balances.  Make sure those accounts NEVER DROP BELOW that reported balance until after you close  (The mortgage companies are making sure you have enough money to use for qualifying and paying any closing costs.)

Your mortgage provider has already factored that in to their decision to approve you, so reducing that amount could cause for the underwriters (the ones that give final approval for releasing the money to pay for the property that you're buying) to disapprove the mortgage.

For example, a close relative was refinancing a mortgage...  Just a couple of days before the scheduled closing date, the mortgage company requested the latest checking statements.  The statements showed that the current balance was $22 dollars below what was required as this relative had gotten busy and delayed depositing the lastest paychecks.  Therefore, this relative could not close on the scheduled closing date.  When another member of the family who was also named on the account offered to put additional money to cover any differences, it was not allowed as it showed as pending and also there was no verification of the source and purpose of the funds. (Was it a personal gift or loan?  If a loan, that would change his available credit!  Where was the proof?  See also item #10.)

10. Don't make unusual deposits or move money around - transferring into or out of savings, retirement, checking account, etc.

During this time you will be required by the mortgage company underwriters (again, the ones who have final say in whether you get the mortgage money) to account for and provide documentation for EVERY transaction.  Keep good/complete records.  Even so-called gifts have to be thoroughly explained as the bank is concerned that it might actually be a private loan.  You're under a magifying glass and banks WILL question any meaningful transaction.  They will scour your bank statements both as part of the pre-approval and then in even more critically during the underwriting process.

This means any large, undocumented deposits will need to be accounted for, as they could’ve been the result of recent debts not necessarily reflected on a credit report.

11. Don't pay off charges or collections (unless directed by your loan officer).

Your loan officer / mortgage broker will know IF and WHEN it's okay.  Since you're not a mortgage expert, rely on the expert - don't assume it's okay because you desire or want to do it.

12. Don't ignore lender requirements.

Know what's expected of you and always take care of it promptly.   
Be on time for meeting deadlines and providing requested documents and information.
Don't disappear. Stay in touch with your lender and be readily available.
Communicate immediately any changes in your status.

Avoiding doing any of the above will better insure that you will not face problems and heartaches with your mortgage as you near closing and you can fully enjoy the property of your dreams!


Copyright Lawrece Yerkes.  All Rights Reserved.

References
http://blog.credit.com/2014/01/the-worst-things-you-can-do-before-buying-a-home-74570/
https://emmloans.com/pages/-the-mortgage-do-and-donts
http://www.marketwatch.com/story/what-not-to-do-when-youre-closing-on-a-home-2015-07-09
http://homesellingiseasy.com/RealtorWebPage?custompage_id=1578350573

http://www.realtor.com/advice/buy/eight-things-avoid-buy-home/
https://www.thebalance.com/real-estate-closing-4028078
https://www.veteransunited.com/money/4-pitfalls-to-avoid-before-buying-your-dream-home/
http://www.nytimes.com/2013/07/07/realestate/pre-closing-credit-checks.html
http://www.yourmortgage.com.au/article/how-credit-cards-can-kill-your-home-loan-application-117519.aspx


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Debt-to-Income Ratio - The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income.    (Most lenders say your total debt-to-income ratio can be no more than 43%, and prefer no more than 28% for your house payment portion.)

More details at...
https://www.consumerfinance.gov/askcfpb/1791/what-debt-income-ratio-why-43-debt-income-ratio-important.html
https://www.thebalance.com/debt-to-income-ratios-315670

http://www.bankrate.com/finance/mortgages/why-debt-to-income-matters-in-mortgages-1.aspx
https://www.credit.com/debt/debt-to-income-ratio/


What Is a Good Debt-to-Income Ratio?
Standards can vary according to lenders. According to Wells Fargo, they consider a debt-to-income ratio of 35% or lower favorable, while a range of 36% to 49% could use improvement and 50% or more limits your ability to borrow.

In addition, having a debt-to-income ratio above 43% can prevent you from landing a Qualified Mortgage. Qualified Mortgages protect you from harmful loan features like balloon payments, negative amortization and interest-only repayment periods. They also limit the amount of upfront fees your lender can charge you. If you want to own your own home, it could be in your best interest to stay far away from the 43% threshold.

Source: https://www.credit.com/debt/debt-to-income-ratio/


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