When buying or refinancing a home, there are so many pitfalls to avoid. Not only could these items cause a delay in closing, they may also cause a denial. Plus, loss of money or dream home! So, understanding how mortgage requirements and certain actions can jump up and bite you in a bad way is key. That’s why we consistently remind clients of the mortgage do’s and don’ts from the beginning. Not only is this good advice for anyone obtaining a mortgage. It’s also great information for Realtors to share with their buyers. The more buyers are reminded, the better. Because too often borrowers quit jobs, buy cars, and more just before closing. Although, even before application can cause serious damage.
Watch Out for Mortgage Requirements, So Do Not…
- Buy a car
- Cosign for someone
- Change jobs
- Quit a job
- Move money around
- Bring cash to closing
- Pay earnest money in cash
- Apply for new credit
- Wait to provide documentation
Want to know why these items can kill a mortgage approval? Make sure to read further!
It’s always handy to have a list reminding you of the things you should not do. Steering clear of a few off limits activities during your Mortgage process will make it much smoother and more likely to close successfully! The following list of don’ts will illustrate the reasons behind the importance of monitoring your activities and exercising caution.
Mortgage Don’ts Explained
Do not buy a car before or during a mortgage!
A car is considered a large purchase. Similar to buying a home, financing a car requires pulling your credit and reviewing employment history. In addition, your car payments will inevitably affect your mortgage eligibility for several reasons. Due to an altered debt to income ratio, the car purchase may impact your credit score in a negative way. Another factor to consider is that your home buying power may decrease. Choosing to complete your home purchase first is the wisest route to go!
Co Sign for Someone Before or During a Mortgage
Many believe that co signing for someone means only the primary borrower is responsible. Actually, the debt reports on the co signors credit too. Plus, most of the time a home buyer who has co signed on a debt must count that payment when qualifying for a house. Some loan programs allow proof of co signing plus last 12 months cancelled checks proving the primary borrower paid the debt directly. But, this is not always an option. Furthermore, a brand new co signed loan would have to be counted. Any time more debts are added, it decreases buying power and may even lower credit scores. Especially, if there are late payments made!
At Minimum, Changing Jobs Affects Mortgage Requirements
Sometimes, a buyer innocently thinks changing employers but keeping the same job type is no big deal. Actually, it can be a huge deal. Changing jobs at minimum requires new documentation such as pay stubs and verification of income. Bigger issues come up when pay scale changes. For instance, starting a new job with commissions or bonuses would be very difficult to count right away. Even worse is becoming self employed. Being self employed requires 1 – 2 years of income verification. So, make sure to stay on your job during the mortgage process! A job change prior to closing is rarely worth losing a house.
Do Not Move Money Around Requires More Documentation!
Moving money from one account to another sounds pretty harmless, right? But, the problem shows up when one bank account shows a large deposit. So, mortgage requirements will want to see where that money came from. Thus, the other account statement is required. Then, what if that statement shows movement of money? It can create a vicious cycle! So, it is best to leave money where it is. It would be advisable that if closing funds are in a savings account or similar, keep it there. Keep it simple and there will be less documentation required.
Do Not Bring Cash to Closing and It Will Not Work
First of all, lenders are required to verify and document source of funds for a real estate closing. There are many banking and federal laws which must be followed in this area. Next, a closing attorney or settlement agent is not going to accept cash of a significant amount. Now, a few hundred dollars may be accepted at closing. But, make sure it is fine with your lender. In order to bring funds to closing, it needs to be wired or be a certified funds check. To learn more about certified funds, click below.
Do Not Pay Earnest Money in Cash
When buying a home, there is typically a required earnest money deposit. It is basically good faith money. But, in order to use the funds at closing it is key that lenders be able to verify the buyer had the funds to pay it. If the deposit is paid in cash and it needs to be verified, rarely can this be done with certainty. Some have actually taken pictures of the cash as proof. But, all that proves is someone took a picture of some cash. It doesn’t say who it belongs to.
So, when it comes to paying earnest money, make sure it is not cash. It should come from the borrowers account in the form of a check or cashier’s check. Although, it could come in the form of a gift. If this is the case, make sure to discuss requirements with your loan officer first! It is hard to correct things once they are done incorrectly.
Do Not Apply for New Credit During a Mortgage
During the mortgage process, it is very important to keep the status quo unless your loan officer instructs otherwise. One of the main areas this applies to would be opening new credit. While getting a mortgage, do not apply for new credit. The inquiry alone will require additional documentation to determine if an account has been opened or not. Furthermore, if new debt was opened, then it must be figured into the borrower’s debt to income ratio. New debt could cause the loan to be denied or create a lower credit score. Either way, it is not good so just wait.
Do Not Wait to Provide Documentation
Your loan approval has mortgage requirements that must be provided. For best results, buyers should always provide the documentation up-front. Borrowers who provide documentation a little over time up until the end will dramatically increase chances of closing delays or last minute denials. Just think, you want an accurate approval very early and to close on-time. So, why wait to provide documentation that is crucial to make this happen? Therefore, the best advice is to provide whatever is asked for immediately.
So to have a successful closing, make sure that you understand these mortgage requirements and avoid the pitfalls. One thing I like to say is “During the mortgage process, be boring.”.