So you’ve reviewed all the mortgage basics and are preparing to take the plunge. You got your free credit score from WisePiggy, saved up and prepared the paperwork. But do you know what NOT to do? Unfortunately, all the advance planning in the world can be undone in a matter of minutes if you make one of these mortgage missteps.
1. Apply for new credit or run up balances on existing accounts
Applying for new credit accounts just before asking to borrow tens or hundreds of thousands of dollars for your new home purchase makes lenders nervous. Yes, some of the best credit cards have sign-up bonuses and rewards programs that can be tough to pass up. However, sometimes you have to prioritize and focus on one financial goal at a time. If owning a home is your dream, then “wait until you have the keys to your new house in your hand before you buy new furniture or a car,” recommends John Ulzheimer, president of consumer education at CreditSesame.com.
2. Increase credit limit on an existing account (even if you don’t plan to use it)
Under ordinary circumstances, increasing your credit limit might improve your credit-utilization ratio (and thus your FICO score). However, this isn’t the case when it’s time to apply for a mortgage.
“Put yourself in the lender’s shoes and imagine lending hundreds of thousands of your dollars to someone else,” Ulzheimer says. “How strict would your criteria be?”
In the months or years leading up to a home purchase it’s better to improve your utilization by paying off old debt. Be careful, though. Every penny you put toward your outstanding credit card balance is a penny you can’t put toward your down payment, so balance is key.
3. Decrease your credit limit on an existing account
Think long and hard before deciding whether to decrease your credit limit.
“Lowering your limit impacts your credit-utilization ratio,” explains Beverly Harzog, credit card expert and author of “Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made.” “This is the amount of credit you’ve used compared to the amount of credit you have available. A lower credit limit will increase your ratio, which in turn, can lower your score.”
In other words, especially if you have a balance, lowering your limit may also lower your FICO score, since amounts owed accounts for 30 percent of the calculation.
4. Close old accounts
Closing accounts can work against you in a couple of different ways. First, especially if you are still paying off a credit card or other debt, taking away your ability to access credit may increase your credit-utilization ratio, thus lowering your FICO score. In addition, 15 percent of your FICO score is attributable to the length of your credit history. In other words, the longer an account’s been open and in good standing, the better.
5. Make a career change
Hate your job and want to quit? Or maybe you’re thinking of taking the plunge and leaving a life of steady paychecks to become an entrepreneur. Unfortunately, quitting your day job at the wrong time can significantly delay your timeline to home ownership. Lenders may require two years of tax returns from self-employed individuals who don’t make a guaranteed salary. And according to Ulzheimer, even changing salaried positions within the same professional field can make lenders think twice. He suggests getting the mortgage loan first and then changing jobs or careers.
6. Pull money out of nowhere
While you know that $1,000 deposit from your dad is a birthday present and not a personal loan, your lender might not and proving it can be a time-intensive undertaking.
“Lenders use financial documents to provide more accurate qualifying numbers,” says Margarita Mueses, bilingual housing counselor with American Financial Solutions. “Lenders want to see the potential borrower’s employment history, credit history, current assets and sources of income the individual has to support repaying a mortgage.”
Talk to your lender about how to properly document gifted money or other windfalls.
There is more at stake during the underwriting process than mortgage rates. Don’t go through all the trouble of getting preapproved only to be turned down later. The thing these six mortgage missteps have in common is they all reflect major changes in your financial life. Keep things on an even keel to give yourself the best chance at a smooth sail into homeownership.