If there’s one thing that I’ve come to learn about finance and real estate, it’s that most people have very little knowledge of the inner workings of financial products like mortgages and credit thanks to these products being overly complicated and because consumers receive very little education on the topics. There’s a great post I see every tax season that echoes this sentiment:
After you’ve gone under contract to buy a home, the final “All Clear” from the bank is typically one of the very last things that happen during the home purchase process.
So, at that point you’ve already spent hundreds, maybe thousands of dollars on inspections and appraisals on your new home. So the LAST thing you want to hear is that the bank is rejecting your home loan due to something you did recently that could have been avoided.
The following 14 mistakes are great to make if you don’t want to get approved for a home loan!
1) Don’t BUY a car, furniture, or any other big ticket items on credit.
Banks calculate something called debt to income ratio, which is the % of your debt payments to your total monthly income. There are limits to how much your debt to income ratio can be. When you take out new loans, this makes your debt to income ratio worse, potentially threatening your ability to get a mortgage. Ask yourself, do you really need that fancy new car now?
2) Avoid Changing Jobs (unless it’s a really good change)
Changing jobs can be a good thing. But doing so right before your banks lends you hundreds of thousands of dollars can make things a little more challenging. The bank is betting on your ability to make your mortgage payments and changing employment makes them nervous. The exception here is a job relocation.
3) Don’t QUIT Your Job
No job, no mortgage. It’s that simple. Don’t quit your day job.
4) Don’t Miss Any Payments
If you miss a loan payment, it’s going to be reported to the credit bureaus and you can be sure that a recently missed payment will make your bank nervous.
5) Don’t make large cash deposits into your bank accounts
Your bank is going to review at least the 2 most recent months’ bank statements. They are checking to verify your payroll checks being deposited and your loan payments being made. If there is a mysterious large cash deposit being made, they are going to want proof of what it is and you’d better have a good explanation. If you’ve been saving your money under your mattress, it’s time to deposit that money before you get serious about home shopping!
6) Don’t buy anything you’d be ashamed to show a banker (they’re going to look at your bank statements!)
Your loan officer is going to look at your bank statements. Don’t be buying anything you wouldn’t want your Momma to see.
7) Avoid moving large amounts of money between accounts (like savings to checking)
Before the housing crash in 2008, banks were handing out NINJA loans, No Income, No Jobs, No Assets, (this is not an official term but lending requirements were very relaxed). Now, banks are very restrictive in their requirements. With that in mind, all financial moves should be made with caution. If you need to move money, make sure there’s a good reason and be prepared to explain the reasoning.
8) Don’t lie on your credit application
You probably have no intention of lying on your loan application, but this needs to be said.
Lying on an official application is fraud.
Don’t even stretch the truth because eventually it will be discovered. Loans, income, assets, etc. Make sure you accurately report it all because the last thing you want is to pay for inspections, appraisals, and have thousands of dollars of earnest money at risk when trying to buy a home only to have the deal fall apart at the last minute when your bank discovers the error.
9) Don’t let anyone make inquiries on your credit score (other than your mortgage lender)
If you’re curious what your credit score is, ask your lender (who may or may not be able to share it with you). Also, don’t find out by way of applying for a new credit card or loan. Refer to item #1.
10) Don’t spend your closing costs and down-payment money
You’ll need your downpayment and closing costs at closing. If you don’t have it, you’re not going to get the keys to your new home. So don’t spend the money!
11) Don’t overextend yourself
100% of the time, lenders will tell you that you can borrow more than you really should but they also can’t determine who much you can comfortably afford to borrow. That is your responsibility.
You should have a frank and realistic discussion with your family about how much you can afford to pay each month on your mortgage. Remember, it’s not just your mortgage you have to take into account. It’s insurance, taxes, HOA fees, and home maintenance.
As Dave Ramsey likes to say, your home should be a blessing not a curse!
12) Don’t Co-sign on anyone’s loans.
Co-signing on someone else’s loans is essentially taking out the loan yourself. If the person who took out the loan stops paying on the loan, guess who the lender is coming after….. YOU!
Also, your mortgage lender may take this into consideration on your total debts, even though you weren’t the one receiving the benefit of the loan.
13) No “90 Days Same as Cash” Purchases
“90 Days Same as Cash” will often be considered a loan by the bank. And because you’re paying off the balance in 3 short months, the “payments” are going to be rather large (since you’re only paying it off in 3 months instead of spreading it out over a longer time, like 24 months).
If you really, really need to make the purchase, talk it over with your lender before yo make the purchase.
14) Don’t be in debt to the IRS
If there is one entity (other than the mafia) to whom you DO NOT want to be in debt, it’s the I.R.S.
If you’re in debt to the IRS, you probably need to re-prioritize your desire to purchase a home. Pay off your debt to the IRS and get back on your feet. If you need help with your finances, I suggest looking into Dave Ramsey and his outstanding Total Money Makeover book.
If you can even find a lender willing to loan money to you for a mortgage, I can guarantee that the rate is going to be much higher than if you weren’t in debt to the IRS, which will further worsen your financial situation by paying way more on your mortgage than you should.
Recap
Buying a home is an expensive and very intense purchase. Avoid making costly mistakes before you even find your next home and make sure your home purchase is a happy one!