If you’re hoping to purchase a home soon, there’s plenty of items to concentrate on. Your loan officer or realtor will probably give you a list of the documents you’ll need, and some “to do” items, like check on homeowner’s insurance and save your paystubs.
Getting a mortgage, however, isn’t just about the “do’s”. Committing any of these “don’ts” can easily prevent you from being approved, whether you’re planning to buy a house in the coming months or are in the process now. Don’t let these “don’ts” cost you your new home!
1) Switching from an employee to a self-employed position:
The requirements to verify salaried/hourly employees’ income are straightforward: W2’s and paystubs are often all that’s required. Changing jobs, particularly if in the same field with salaried income, isn’t an automatic deal killer. Transitioning from an employee to self-employment (aka contractor or “being paid by 1099”) is an entirely different matter. Self-employed borrowers’ incomes are documented not by recent paystubs, but by IRS verified tax returns for the prior year (or two). An employed borrower who could easily obtain a mortgage today will likely have to wait 2+ years to qualify if he becomes self-employed! Consult your lender BEFORE you consider any employment changes, particularly if self-employment is involved. Don’t quit your day job to become a Grubhub driver!
2) Not balancing your checkbook:
You may regard overdraft fees as mere inconveniences that “just happen”. Your lender, however, likely views them as financial irresponsibility. Some loan programs require underwriters to review applicants with overdrafts more stringently than those without, regardless of credit scores or debt ratios. If your recent bank statements have overdraft fees, tell your lender UPFRONT, rather than hoping they don’t notice. They will!
3) Applying for new credit and opening accounts during the loan process:
Transferring a $9,000 credit card balance at 16% interest to a new, 0% account will lower your payment and help you qualify for the loan, right? Not so much! By making moves like this during the loan process, you’re risking closing delays, perhaps even your loan approval. Purchasing a new car before closing your mortgage (even after the mortgage is approved!) may cost you your house. Lenders monitor your credit for new inquiries and accounts during the loan process. Any new accounts must be verified, then added to debt ratio calculations. Unless you plan to live in your car, buy it AFTER you’re in your new home.
4) Ignoring small bills:
“My insurance was supposed to pay that bill, it was only $30!”, “I closed that credit card, but they still sent me another bill, so I just ignored it”, “I missed the payment cutoff, and they added a late fee, so I just paid double the next month”. These may seem like trivial matters to you, but credit bureaus view them far differently. Even with flawless credit, a small collection or late payment (even on a $25 credit card bill!) can drop your credit scores dramatically. Don’t endanger your loan approval: pay all your bills promptly, whether you think they’re fair or not!
5) Not filing tax returns:
Taxes are a pain, right? You can always do them later, or maybe the IRS won’t notice! Guess what? They will, and so will your lender. Lenders typically verify applicants’ income with IRS tax transcripts. If you haven’t filed, there’s no transcripts, and you may have just lost that new house. Filed a tax extension? That’s OK, if you paid any estimated taxes due. Filed a tax extension, missed the extended filing date, so decided to wait until you need a mortgage to file? Not OK, not at all!
There are other obscure ways to jeopardize your financing, but remember, when in doubt, ask your lender BEFORE you quit your job, buy a new car, bounce some checks, or fall behind on bills!