Buying a home and understanding how to get a mortgage involves key steps. Some are non-negotiable, while others depend on the borrower, property, and loan program. Then, part of the process results from correcting mistakes during the home buying process. That’s right. Normal parts of life include activities such as depositing cash, buying a car, and changing jobs. Yet, not understanding the significantly negative impact these can play in a mortgage process could be detrimental. So, knowing what NOT to do is almost as important as knowing what to do.
To make it easier on a home buyer, the loan officer, and hopefully, the real estate agent, are sharing helpful information explained in this article. A little education, in the beginning, could avoid extra paperwork, a delayed closing, or more importantly, a denial. As a Realtor, it is key to share tips like these during the first discussion. Living by these rules will definitely make life easier on all involved. I like to say “Be boring during the loan process“. So, let’s discuss how to get a mortgage, but focus on the areas to avoid.
How to Get a Mortgage – After Applying, DO NOT:
- Quit or change jobs
- Apply for debt
- Pay off collections
- Spend too much money
- Transfer funds excessively
- Pay earnest money, due diligence, or deposit with cash
- Deposit a cash gift
- Reduce hours on the job
- Change pay type: hourly to commission, W2 to 1099, etc.
- Trade a vehicle
Other than providing this list, the best piece of advice is to ask your mortgage loan officer before doing any of the above. Even if not on this list and there is a question, we welcome and encourage questions before acting. As sometimes the wrong cannot be righted. At least not quickly. Upon reviewing this top 10 list, notice that these could be broken down into 3 distinct groups. Employment, credit or debt, and banking are the 3 major categories. Therefore, let’s expand on these 3 major areas to better understand the reasoning behind these tips.
How to Get a Mortgage – Credit Tips
As mentioned, several items on the list pertain to credit. Obtaining new credit, paying off debts, transferring debt, and buying on credit are nothing out of the ordinary in a person’s life. Although, during the mortgage process these areas could cause major issues such as:
- Lower credit scores
- Increased debt to income ratio
- Increased documentation
- Lowering available assets
These areas stretch from minor inconveniences of proving the new debts or recently paid off loans to causing significant qualification issues. Lowering a credit score from 680 to 679 or from 640 to 639 could mean program changes. For instance, borrowers may have loan approval at a 45% debt ratio for a USDA purchase at a 680 score, but a 679 score may not approve a 45% ratio. A buyer may think, I have a 760 credit score so what does it matter if my score decreases 1 – 20 points. Even credit scores in this range could increase an interest rate and mortgage insurance. Additionally, automated approvals may accept a debt to income ratio of 56% with a 760 score but not at a 740.
What if a buyer thinks it is a good idea to take part of their assets to pay off a debt? To a buyer, reducing debt should be a good thing and it is. But, what if those assets are needed for closing costs or they are being used as reserves to obtain loan approval. Paying down the debt may not have been necessary and then it actually causes a denial.
Error in Paying Off Debts Example
Actually, we had a buyer using a USDA no money down home loan. Just before applying, the buyer used an income tax refund to pay off a car loan of about $6,000. At first glance, this sounds good because it lowers the debt ratio. The problem is the buyer’s debt ratio was fine, but the credit scores were too low. For qualification, the buyer should have paid down credit card balances which would have increased the credit score. Fortunately, with some work, it was able to be fixed. The buyer opened the loan again, paid off the credit cards, we completed a credit rescore, and the buyer qualified for a no money down USDA loan.
Obviously, this was a success. But, notice how much work went into fixing what the borrower thought was a good thing. Any other day, paying off debt is an awesome thing. Just before or during a home purchase – not so good.
“Be Boring During the Mortgage Process.”
How to Get a Mortgage – Employment Tips
Employment changes can vary widely from a pay raise through losing a job. Plus, there can be a lot in between. Some changes are for the good, but many cause issues or at least more documentation.
Examples of Employment Causing Mortgage Approval Issues
Each of these scenarios below can cause issues for a mortgage loan. Again, more documentation is the least of one’s worries. But, it can also cause a denial.
- Reduced hours
- Hourly/salaried to commission
- W2 to 1099 (which means contractor or self-employed)
- Changing jobs
- Quitting without a new job
- Overtime, bonus, or commission not continuing
When telling a buyer not to quit their job during the loan process, the answer is usually, “Of course, who would do that?”. Believe it or not, the above items happen more than one would like. Even after being told not to. Common reasons include: The new job is the same as the prior job, as a teacher we are off during the summers anyway, I will eventually get a new job, my commission or 1099 pay will be higher than my salary was, and more. Guidelines such as requiring at least 12 – 24 months of new 1099 or commission income come into play. Waiting for a new paystub(s) after leaving a job is another delay. So, the best thing to do is to talk to the loan officer first and hopefully, any changes can wait.
How to Get a Mortgage – Asset Documentation
The remainder of the most common issues which are usually controllable involves assets. Just like the other categories, many of these are just mistakes and can easily be avoided. Up-front knowledge and communication solves most of these. Hopefully, an obvious tip is not to spend money during the mortgage process other than paying bills on time. Although, assets may not be necessary for some buyers using a no money down loan. But, even these approvals may require funds in the bank.
Cash is often an issue in the mortgage process. Usually, proving the source of a cash deposit or cash payment for earnest money deposit is nearly impossible. So, how can cash be counted as a borrower’s asset or proof of deposit if the source cannot be proven? Therefore, it is imperative not to pay a contract deposit with cash or even deposit significant cash deposits. Even gift funds from family should not be a gift. Again, not possible to prove the source.
Finally, transferring funds could be problematic. Typically, this is not something that creates a loan denial. But, transferring funds would at least require additional documentation to prove where the money went to and came from. Thus, some frustration on the borrower. Yet, it would be necessary.
In the end, remember that borrowers are required to attest by signatures that there have been no significant changes after loan application. Not mentioning new debts, employment changes, or other areas could be considered mortgage fraud. There are severe penalties, whether intentional or unintentional.
In a perfect world, the best quick tips for how to get a mortgage would be:
- Be boring
- Listen to your loan officer
- Ask before acting
- Provide documentation up-front
- Enjoy your home purchase!
So, contact us first and then happy house hunting!