Home Purchase Basics
Whether it’s your first or your third, buying a house can be both an exciting and arduous time. First-timers would do well to follow these Do’s and Don’ts of the home financing process to avoid any surprises. If you know your responsibilities and are well-prepared, then you’ll be more likely to secure the best rate and option available to you. Even if you've been through the process before, take a few minutes now to refresh your memory. You never know - it might save you a bit of time down the road!
Count On Yourself To:
1) Continue to make mortgage and rent payments on time
Doing so shows your lender that you are reliable and have a steady debt repayment history. Late payments negatively impact your repayment history, as well as flagging you as a less desirable applicant since it shows that you are less likely to repay your debts. Since you are applying for a home loan, it is in your best interest to show the lender that you are responsible with your current housing situation.
2) Stay current on all existing accounts
Just as you should continue to make mortgage and rent payments, you should also make sure to stay current on all of your other accounts, such as credit cards and student loans. Your credit score is a huge factor in the financing process and single 30-day late notice can bring down your credit score significantly, affecting your loan approvability, interest rate, etc. Lenders look favorably upon those who show a steady payment history; it identifies the likeliness of an applicant making regular mortgage payments.
3) Keep working at your current employer
You will need to provide proof of employment in your loan application, and show lenders that you are responsible and have a steady source of income. Changing employers, or even positions within the same company, will require additional documentation, and can delay the loan process. Lenders look for applicants who have a steady employment history (at least a two-year work history is desirable), as it is a good indication of an applicant’s ability to make payments. If a change in employment is inevitable, be sure to consult with your loan officer as soon as possible to discuss the impact this change could have on your loan approval.
4) Continue to use your credit as normal
Any sudden change in spending habits can immediately raise a red flag for your lender. If there is any indication that you are veering from your normal spending habits, it can have an adverse effect on your credit score. Avoid making large purchases, maxing out credit cards, or using more than 30% of your total available credit line. Incurring additional debt will have a negative effect on your debt-to-income ratio, and make you a less desirable loan candidate.
5) Be upfront and honest with your loan officer
It is essential that your loan officer be aware of your debts, assets, changes in your employment status, and so on. S/he is working on your behalf to secure you a good rate and make the process go as smoothly as possible, and needs all of the correct information in order to do so. Whether you are expecting a loss of income or have changed your employment status (i.e. promotion, demotion, job loss) – you should be sharing these details with your loan officer. By having all of the correct, up-to-date information, your loan officer can provide you with the most accurate information regarding your loan.
6) Be diligent in returning requesting items
The home financing process is a very time critical one, so do your due diligence by preparing all of the necessary documents ahead of time, and being readily available throughout the entire process. There may be instances where an issue is time sensitive and documents need to be submitted within a certain time frame. Plan ahead and organize as much documentation as you can, making sure that everything is up-to-date. Failure to return requested items in a timely fashion could result in delays in the financing process.
During the Financing Process, these are things you should NOT do:
1) Make a major purchase (car, boat, furniture)
Doing so could negatively impact your credit score, your debt-to-income ratio, and therefore your loan qualifications. Put off making any major purchases until after the closing of your mortgage. If it is absolutely necessary (i.e. your car has broken down and you need to purchase a new one), consult with your loan officer first so that s/he can calculate your new qualification ratio with the additional debt, and advise you on the appropriate steps and paperwork.
2) Apply for new credit or take out any new loans
Opening new accounts increases your liabilities, and significantly impacts your debt-to-income ratio. Every time you apply for new credit, potential lenders and creditors pull your credit report, which automatically results in a loss of points from your credit score. In addition, new credit typically acts as a negative factor, lowering your score. You also risk raising your debt ratio, possibly enough to result in being disqualified from your home mortgage financing. (It should be noted that CLOSING an account can have just as much of a negative impact your credit score.)
3) Transfer balances from one account to another
Moving money from one account to another may seem like an innocent move, but the home financing process is very strict and detail-oriented. Any change in your asset portfolio will need to be accompanied by extensive documentation. This can then result in delaying the closing of your mortgage. If you need to make a transfer, consult with your loan officer beforehand to determine the proper documentation process.
4) Change bank accounts
You should maintain the same accounts and details that you had when you first started the financing process. Lenders need to be able to source and track all of your assets, and that is made significantly easier if you keep everything consistent. Changing bank accounts makes it that much more difficult as extensive documentation will be required. This process could then result in the delay of the closing. It is better to avoid making any drastic changes during the loan process and instead wait until after the closing to do so.
5) Make large or cash deposits into your account
Any kind of deposit not related to payroll will need to be explained and accounted for, thereby requiring an extensive paper trail to prove the source of that money. If you have a large tax refund coming in, an inheritance, or even a birthday check for $500, you’ll need to provide copies of everything, from checks to deposit slips and any additional accompanying paperwork. Lenders will question these deposits, so be prepared and speak with your loan officer beforehand to discuss the necessary steps.
6) Pay off any debt without discussing with your lender
Although it seems like paying off debt would be a positive move in improving your loan approvability, it can actually result in a drop in your credit score. In certain circumstances, it may be necessary to pay off any collections; in that case, your loan officer will advise. Otherwise, it is always best to discuss these options with your loan officer before taking any action, so that it can be determined how your qualification ratio might be impacted.