Preparing to take the biggest test of your life, you study extra hard and get a good night’s sleep before the big day. Preparing for a job interview, you research the employer and you show up on the big day at least 10 minutes early. By the same token, when preparing to take out a mortgage for what might be the biggest purchase of your life, there are certain things you do, like collecting work and bank statements, and certain things you don’t, which we discuss below:
1. Don’t Lose, Quit or Change Jobs
To a loan Underwriter, a job signals consistency, continuity and predictability. What lenders don’t like are surprises. Once you leave that safe space and cross the line into unemployment, you’re deemed less reliable and stable.
So, if you have any thoughts about changing jobs, even for a better, higher-paying one, you better sit tight and bite the bullet until you’ve moved into your new home.
If you lose your job before you apply for a loan or lose your job during the loan application process, you will have to show your lender that your situation is merely temporary. Whatever you do, don’t try to hide your current job status from your lender. Concealment could be considered loan fraud. Rather, be prepared to provide a letter of explanation for any gaps in employment of 30 days or more.
If you are self-employed, realize upfront that there will be a greater burden on you to show your income stream than there will be on someone working for wages. Moreover, be prepared to document your job income not only by showing tax returns from the last two years, but also bank statements from the past 12 months.
2. Don’t make big credit card purchases
Unless you can keep your balance under 50 percent of your limit, it’s almost never a good idea to put big purchases on your credit card — and when applying for a mortgage loan, you should absolutely never do it.
Lenders closely follow debt-to-income (DTI) formulas, so if a new credit card charge or even a new credit card application upsets that delicate ratio, you will greatly diminish your chance of being approved for a loan.
Winning a loan approval is largely based on your lender’s belief in your ability to repay your loan. Ideally, your lender wants to see that you use credit sparingly and responsibly. To make a large purchase financed by a credit card not only signals a certain recklessness and volatility that lenders abhor, it will throw off your DTI ratios.
Lenders are trained to look for red flags. Untimely, unscheduled and impulsive large purchases, especially when you’re applying for a loan, certainly qualify as such and are likely to ruin your chances of obtaining a loan.
Depending on your total available credit, closing a credit card account with a high credit limit could hurt your credit score, particularly if you have high balances on other cards or loans. If you have zero balances, your credit utilization rate is zero, and won't be impacted by the loss of a balance.
3. (But) Don’t close your current credit card accounts
Closing a credit card, especially one with a high credit limit, can hurt your credit score, particularly if you have high balances on other cards or loans. So, although your intentions may be good – you’re trying to clean up your credit by consolidating the number of credit cards you’re using -- don’t do it. Such a move could make it appear your debt ratio has gone up.
4. Don’t count retirement income as income if you only tap it sporadically
You don’t get to count money stashed away in an IRA because lenders rarely count it. Even if you have a quarter of a million dollars in your retirement account and high FICOs, you can’t tell your lender you’ll randomly tap your account in retirement to help pay your mortgage. If you’re retired, your income from Social Security, pensions, rental income and other validated sources will have to be enough to qualify you for a mortgage.
Again, lenders don’t like “sporadic,” they like steady. For your IRA account to count as income, you would likely have to show verification of regular receipt of drawdown income for two months and verification that the payments will continue for three years.
In other words, even though you could have an excellent credit history and a respectable nest egg tucked away in your IRA or 401(k), you can’t simply tap those accounts, whenever you prefer, to make up for any mortgage shortfall.
If this retirement standard seems unfair, don’t automatically hold your lender accountable. Government agencies, which buy many of the mortgages that lenders make, often insist that lenders look for “regular and continued receipt” of income from retirement funds and to assess whether “the income is expected to continue for at least three years.”
Lenders sometimes are able to expand their guidelines governing retirement accounts. In some cases, agencies that buy loans from lenders, allow lenders to annuitize applicants’ retirement fund assets, converting untapped IRA and 401(k) wealth into “income” that helps them qualify for a mortgage.
5. Don’t move (transfer, withdrawal or deposit) large sums of money
Moving large sums of money, especially when they are inconsistent with your usual financial pattern, will draw extra scrutiny from your lender. Sometimes, such events can’t be helped. If these movements of funds are absolutely necessary, be prepared to explain and document their occurrence.
Loan applications get denied all the time for all kinds of reasons. Your application could have been incomplete, the appraisal for the home you want to purchase might have come in too low, there could be a mistake on your credit report.
Whatever the reason, your lender will have tell you why your mortgage was denied. Under the Fair Credit Reporting Act (FCRA), if your loan is declined, lenders are required to provide clear reasons for rejecting your loan application.
That said, don’t make a rejection easy for them. Don’t make any sudden or rash decisions regarding your job or credit, be prepared to explain any unusual or inconsistent movement of funds, and don’t expect to make any intermittent drawdowns of your retirement funds.
When applying for a home loan or refinance, remember to value consistency above all else.
Your goal is to show your potential lender that your past behavior truly is a predictor of future performance.