At the beginning of your home search, you most likely obtained a “pre-approval” letter for a home loan. The “PRE” is an important part – you have not yet received a final approval for the loan. You’ll have more hurdles to clear before a lender legally commits to funding your home loan. Some buyers (who don’t know any better) can end up killing the deal if they violate these important DO’s and DON’Ts before closing day.
(5) DON’Ts Before Closing Day:
- Don’t go credit crazy: It’s almost become cliche in the mortgage industry, but the warning still bears repeating. Don’t buy a truckload of furniture until AFTER your loan closes. Avoid obtaining credit for any major expense (like a car, boat, or a new bedroom set).
- Don’t shuffle dollars and cents: Lenders will review your most recent bank statement as part of the pre-approval process. It’s not like they forget about it after that. They’ll take another look at your assets and bank records a second time during the underwriting process. You’ll need to explain any unusual deposits or withdrawals. Lenders will require clear documentation and a paper trail if you’re putting gift funds toward a down payment or closing costs. Stuffing a wad of undocumented cash into your account is going to raise some red flags.
- Don’t get behind on bills:Having a late payment hit your credit report before closing can devastate your deal. Payment history comprises about 1/3 of your credit score. One solitary 30-day late payment can drop 60-110 points from your credit score. Maybe not a huge deal if you had an 800 score, right? Possibly. But if that 30-day late blemish is a mortgage or rent payment, some lenders will boot your application altogether. Many will require at least 12 consecutive months of on-time payments in order to qualify for a home loan.
- Don’t co-sign on another loan:Co-signing a loan is arguably always a bad financial move. But it’s especially risky when you are trying to obtain your own mortgage loan. It means you’re financially liable for someone else’s debt. Yes, that someone else might be the most responsible person on the planet. But lenders will still need to factor that new monthly obligation into your overall profile. Adding one more debt to the list could compromise your debt-to-income ratio.
- Don’t change employment:This probably goes without saying, but losing your job is going to be a big problem. Even job-hopping can present some major hurdles. Lenders want to see stable, reliable, long-lasting income. Lenders are likely to slam on the brakes if you take a new job in a different field. OR, if you decide to start your own business. Even if you get a promotion but your income changes to mostly commission-based, this could be a big problem.
Bottom line: Any change to your employment is significant. Keep your loan officer in the loop, and ask questions when in doubt. The last thing you want is to waste time and money going through the contract process if you’re never going to get the loan.
(3) DO These Things Before Closing Day:
- Pay your bills on time: Be sure to pay all your bills on or before the date they are due. Lenders do NOT like to see any late payment notices show up on your credit report right before closing. This will raise a red flag and can cost you a higher interest rate.
- Keep your bank account clean: No large unexplained deposits and certainly no bounced checks or overdrafts. Lenders like to see regular, stable income and expenses. Anything unusual can raise a red flag. If you need to make a large purchase or deposit, be sure to call your lender first. Ask them how they recommend that you handle the transaction.
- Ask questions: If you have any major changes in job situation or financial status, talk to your loan officer BEFORE making any moves. They can advise you on the impact of such decision and possibly provide alternative methods that won’t affect your home purchase. Communication is crucial to a successful closing!