10 Things to Avoid Before Applying for a Mortgage
Most people who wish to purchase a home need to acquire financing. The 10 things listed below are what you should know before applying for a mortgage to be sure you are a good candidate for a loan. Making these mistakes can reduce the amount of financing you qualify for, result in a higher interest rate or cause your lender to reject your mortgage application altogether. Most mortgage lenders will give you this information when you go to apply, but it’s a good idea to know this before you even seek out a lender.
1. Do Not Make a Major Purchase
Buying something expensive, like a new car or boat, could cause you to lose the ability to get a mortgage. If you have to take out a loan or put that charge on a credit card, it could affect your credit score and debt-to-credit ratio. Even if you have a lot of cash to cover the cost, depleting your account may cause you not to have enough cash on hand for the down payment of the home, closing costs, insurance, and other related costs.
2. Do Not Take on Debt
One of the factors your lender will look at will be your debt-to-income ratio – how much debt you’re paying off each month in comparison to how much money you’re making. If it’s above a certain threshold, you’ll be considered a risky borrower.
3. Be Aware of Your Credit Rating
Your credit score tells a lot about you. It is often one of the criteria that lenders use when approving homebuyers for mortgages. It lets a lender know whether or not you’ll be able to pay your debts in the future and that you are fiscally responsible. It’s best to check your credit score before you apply for a home loan. If asked what it is, be honest, because that score will definitely be verified.
4. Pay Your Bills on Time
Not paying a bill or missing payment deadlines will negatively affect your credit score. If your history shows that you can’t pay your bills on time, lenders will assume that you won’t pay your mortgage timely either. If your credit score is not what it needs to be, it’s best to work on improving your credit score rating before applying for a mortgage.
5. Do Not Max Out Credit Cards
Exceeding your credit card limit will hurt your credit score also. Your debt-to-credit ratio will be used to determine whether or not you are a good candidate for a mortgage. That number is the amount of credit you’ve used relative to your credit line. For example, if you have a credit card with a $10,000 credit limit and you have charged $6,000, your debt-to-credit ratio is 60% (divide the amount you have charged into the total credit limit). That ratio ideally shouldn’t be more than 30%, so you’ll want to keep that percentage as low as possible.
6. Don’t Close a Credit Card Account
Closing a credit card will not necessarily improve your credit score. If by closing a credit card account it causes your debt-to-credit ratio to skyrocket, your credit rating could take a dive.
7. Don’t Switch Jobs Before Applying
A lender wants to see that you have a stable source of income to pay a mortgage bill each month. If you make a career change even several weeks before you apply for a mortgage, you may not have enough payment stubs to show your lender how much you’ll be clearing with each paycheck.
8. Marrying Someone with Bad Credit Could Cause Problems
While you might not be brave enough to ask your partner about their credit score before marriage, keep in mind that if he or she has bad credit, you may not be able to purchase a home together. Both of your financial histories will be taken into account if you’re buying the home together. Remember this as you incur debt paying off the wedding before attempting to get a home loan.
9. Don’t Co-Sign a Loan
When you co-sign a loan, your credit score could be adversely affected if they can’t keep up the payments. Keep this in mind if you intend to become a homeowner at any time before the loan is paid off.
10. Don’t Make Big Deposits
It is okay for your relatives to help you pay your down payment, however, be aware that there are certain rules for this type of situation so that it doesn’t hurt you more than help you. Lenders want to see that you haven’t made any unusually large deposits into your bank account recently, even from relatives for your down payment. Read our blog on Rules for Down Payment Gifts so you will be aware of what is involved.
Reducing your financial obligations before applying for a mortgage is best. Working with a financial advisor prior to applying for a loan would be a great idea.