This could just as easily be called, “Top Tips for a Loan Approval” or “Don’t Make These Mistakes” but however you word it, there are some things that you absolutely must avoid when applying for a mortgage or while your loan is in the process of getting an approval. For a smooth closing and a stress-free process, here are some things you want to pay attention to.
When you apply for credit, even if you change your mind and don’t complete the purchase, your credit report will note that some merchant or service provider looked at your credit report at your direction when applying for a loan. Say that you wanted to buy a new car and applied for financing at your bank but decided not to buy the new car after all. Even though you didn’t add to your debt you did create a question mark at the mortgage company.
The lender will see that you applied for credit but because it doesn’t show that you decided not to take the loan after all, the lender doesn’t have verification of that. Credit balances and monthly payments are reported to the credit bureaus every 30 days so the lender can’t verify whether or not you have a new monthly payment.
Okay, let’s now say you did buy that car and you can show your monthly payment to your lender, how does that affect your debt ratios? Buying anything on credit while your loan is being approved can mean you suddenly can’t qualify due to your new debt load. In fact, lenders take a look at your credit report one last time right before ordering your closing documents.
It might sound a bit counterintuitive but closing out unused credit accounts might actually hurt your credit scores, not help them. How so? One of the five components that make up your credit score is how much you have available for credit compared to your credit line and makes up 30 percent of your score. The ideal balance-to-limit is around 30 percent.
Say you have two credit cards each with a $5,000 limit for a total line of $10,000. One card has no balance and the other a $3,500 balance. Your balances are 35 percent of your credit limit which in turn improves your credit scores. If you close the account with the zero balance, suddenly your balance is 70 percent of your credit line which will cause your scores to drop.
Lenders want to see at least a two year employment history with steady, regular income. Even if you’re self-employed and don’t get paid on the 15th and 30th, you’ll still need to demonstrate a consistent two year track record.
With a two year history the lender can make a reasonable determination your income will likely continue into the future. You’ll be asked to provide your most recent pay check stubs covering 30 days and your W2 forms from the past two years as well. For the self-employed your income will be evaluated using your most recent two year federal income tax returns and a year-to-date profit and loss statement.
This two year history applies to other sources of income such as commissions and bonuses. Unless you can demonstrate a regular pattern of earning such income, it’s possible that income can’t be used.
Did you get a great job offer from another company and it pays a lot more than what you’re making now? Guess what? It’s best to stay put until your loan is closed. Because lenders need 30 days of pay stubs to verify income, it will take some time before you get those from your new employer and you’ll miss your closing date.
Cash to Close
You’ll be asked to provide your most recent bank statements to show you have enough for your down payment and closing costs. If you plan on putting 20 percent down on a $300,000 home and closing costs are around $7,000, your statements should show at least $67,000 in cash in the bank. For first time buyers and some low-down-payment loans, you may also need an additional amount for cash reserves.
Your lender will not just make sure you have enough money but verify the source of the deposits. If you get paid on the 15th and 30th the lender looks for deposits around those dates that match your pay check stubs. Are there deposits on other dates? Then make sure you can document you received the funds from a legitimate source, such as a gift from a family member or the sale of a personal asset. Garage sale over the weekend? Keep a copy of your garage sale advertisement and provide it to your lender. Such irregular deposits, even small amounts, must absolutely be documented. Otherwise, the funds may not be counted.