How to Get Mortgage Approval
by Shawn Carvin, Senior Mortgage Banker
From the very moment you decide that it is time to purchase a home, one of the most important goals will be to get mortgage approval. Even prospective home buyers with an immaculate credit history can end up sabotaging themselves at some point during the critical phase between pre-approval and final approval of a home loan.
To help you avoid some of the common mistakes people make on their way to buying a home, I’ve compiled this list of do’s and don’ts. Keep in mind, these are not merely suggestions. Doing anything listed in the “don’t” category could derail your mortgage approval and result in cancellation of your real estate purchase contract. Likewise, overlooking the important task in the “do” category can cause undue delays in closing; in extreme cases, it may even create an opportunity for a competing buyer to snatch your future home out from under you.
The DO NOT list
Do not apply for new credit
This is the number one rule when it comes to getting approval for a home loan. Every time you apply for new credit, whether it’s for a new car, furniture, new appliances, or even plastic surgery, your credit score will be adversely affected by the inquiry – sometimes called a “hard pull.” Once you’ve begun the mortgage application process, new credit inquiries are a red flag as far as mortgage lenders are concerned.
Do not close credit card accounts
Pay your credit card accounts down? Yes! Pay them off? Yes! Close them? No! Paying your accounts down will improve your credit utilization ratio, but closing an account will make your ratio worse.
Do not make large unexplained deposits
Large unexplained deposits in your bank account are another reason for caution as far as lenders are concerned. If you sell an old car for a little cash, document it! Make sure you have a bill of sale. Even better, have the buyer give you a cashiers check instead of paying cash. Routine deposits such as your payroll check don’t pose any problems, but any other deposit of a significant amount going into any of your accounts should be explainable and well documented.
Do not pay off old collections or charge-offs
This may seem counter intuitive. If you have old debts on your credit report that you’d like to clean up, that’s great. But sometimes, paying off these negative items can actually cause your credit score to drop temporarily and threaten your mortgage approval. So unless advised to do so by your mortgage lender, hold off until sometime after you get the keys to your new house.
Do not make any major changes in your assets profile
Changing investments, opening or closing investment accounts, or moving positions can also throw up red flags. Hold off on any changes until after closing, unless you stand to suffer major losses. And even then, keep your mortgage lender in the loop about what’s going on.
Do not max out credit cards
Not only will running up your credit cards bring your credit score down due to increased credit utilization, it can also cause lenders to get cold feet. Your credit score is fluid, and it can change drastically within a 24-hour period. A good rule of thumb is to keep your each of your credit card balances below 20% of your available credit limit.
Do not do anything else to raise red flags
Don’t change your name or address. Don’t change jobs or co-sign a loan for friends or family. And don’t move your checking or savings accounts to a different bank, or open new accounts.
In short, don’t do much of anything where your finances and credit are concerned. Instead, focus on some of the things that you should continue doing to assure the end result you want.
The DO List
Do be thorough and accurate on your loan application
Avoid snags and delays by taking the time to complete your loan application accurately and thoroughly. Any missing or incorrect information can hold up the loan approval process, so take the time to make sure the information on your application is flawless before submitting it to your lender.
Do make sure you stay current
Make sure all payments are made on time. Late payments show up quickly on your credit report, and they can lower your score in a big way. So stay on top of your accounts and don’t let anything fall through the cracks.
Do gather necessary documents
Get ahead of the curve by getting all of your paperwork organized and ready for your lender. You’ll need documents such as tax returns, paycheck stubs, and banking statements, just to name a few.
Do keep in touch with your lender
In order to close your home loan, it is important to be available to your lender when needed. Staying in contact and keeping the lines of communication open will help expedite the process.