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What Happens if You Gain New Debt During Your Mortgage Transaction?

Buying a new home takes a lot of steps – not the least of which is making sure that you have your finances in order. With that in mind, you dutifully gathered up all your financial records and got through the mortgage pre-approval process before you even started looking for a home.

Now, you just have to get through closing. The gap between the start of your mortgage journey (at pre-approval) and the end (when you finally close the deal) can feel excruciating. Unfortunately, some homeowners get so excited about their plans for the future, they inadvertently delay or outright derail the whole thing by acquiring new credit or debts.

How Financial Changes Can Prevent Closing on a Mortgage

The pre-approval process is pretty intensive, and it’s the closest you can get to actually having a mortgage until there’s a contract on the table. Usually, buyers can expect all the kinks in their applications to be worked out long before it goes to underwriting.

In turn, the underwriting process after a pre-approval should be fairly smooth – unless something in your financial picture suddenly changes. The underwriter is going to request updated credit scores, credit records and other information to make sure there’s been no major changes in your financial picture since the last time they looked.

Anything that alters the picture the lender has of your financial health is going to be scrutinized and is a potential cause for concern. With that in mind, here are some of the biggest financial mistakes would-be homeowners make right before closing:

1. Changing Employment

Maybe you just got a raise that allows you to support your entire family, so your spouse plans to quit to be a stay-at-home-parent. That may fit perfectly with your goals and the vision you have of your future in your new home – but they’d better wait to put in their resignation until after your closing is over.

Steady income counts for a lot when you’re applying for a mortgage, and so does a rock-solid work history. The lender may see a one-income household as inherently less financially stable than a two-income household.

Even changing jobs, if you can avoid it, is something better left until your mortgage closes. That way, you don’t have to worry about the lender getting antsy because you don’t have a history with the new employer.

2. Taking Out a Loan

You probably already have a list of changes and updates you want to make to your new home in mind – and all of it is going to take money. It may have always been in your plans to take out a personal loan to pay for the renovations, so you don’t see the harm in getting started early.

As anxious as you may be to secure those funds and start talking to contractors to see what you can afford, you need to wait until closing. Otherwise, you’ve just changed your debt-to-income ratio dramatically, which will affect how lenders see you – and not in a good way.

If you co-sign a loan for someone else, you can expect exactly the same problems. With that in mind, hold off on co-signing for your son’s car or your daughter’s lease until the mortgage application process is finished.

3. Making Big Purchases

In your overall excitement about becoming a homeowner, it’s hard not to start thinking about the furnishings you need to replace or appliances you want to buy – but you shouldn’t make any major purchases until after your loan closes.

If you pay with cash, you deplete your savings, which could affect how your lenders gauges your financial stability. If you put things on credit (including “same as cash” installment payments), you change your debt-to-income ratio, which is a major factor in determining creditworthiness.

4. Opening New Credit Cards

What if you just open a few new credit cards without using them in anticipation of the future? While that doesn’t sound like a big deal, it could be fatal to your mortgage application – even if you don’t spend a dime. This is because:

  • New credit applications can lower your FICO score immensely. This is partially because new credit inquiries and activity can signal someone who is either currently in financial trouble or about to go on a spending spree. That tends to make lenders very nervous.
  • New credit cards lower the average age of your accounts. The younger your credit history, on average, the lower your credit score may become. Anything that decreases your overall FICO score while your mortgage is pending is bad news.

In short, you don’t want to suddenly throw a new credit card or two into the mix because it will change all the calculations that the lender already made.

5. Applying for Credit to Get Discounts

These days, you can almost guarantee that you’ll be asked if you want to apply for credit when you’re checking out at major department stores like Kohl’s, Macy’s or Home Depot. Most of these stores entice buyers into applying by promising them a hefty discount on their current purchases if they do.

Resist that urge until after you close on the house. Just like Mastercard and Visa, store cards count as credit cards when your lender looks at them, and they’ll damage your chances of a successful mortgage application.

What’s the Bottom Line?

It’s simply this: The pre-approval process gave the lender a thorough picture of your finances, and the bank felt comfortable committing to a mortgage loan based on that information. 
However, they can – and will – run checks to see if anything has changed between the time they made their initial offer and the time you’re ready to buy. You don’t want to do anything that might create problems when you’re this close to the finish line in the mortgage application process.

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