You’ve been saving up for a down payment. You’ve researched home prices. You’ve worked through your budget—and checked it twice.
Good job: You’ve done some of the things you’re supposed to do when preparing for the home-buying process. But wait! Have you considered the things you’re not supposed to do before you apply for a home loan?
The things you shouldn’t do are just as important as the things you should do. With that in mind, here are five things you should not do right before you apply for a mortgage:
1. Don’t apply for a new loan or make any large purchases.
“Avoid obtaining credit for any major expense, like a car, a boat or, yes, a new bedroom set,” according to credit.com. It increases your debt load and, subsequently, your debt-to-income ratio—that’s how much debt you’re paying off compared with how much money you’re making.
2. Don’t add significant debt to your credit cards. And don’t close them, either.
Lenders like a credit utilization ratio of 30% or less. For example, if you have three credit cards with credit limits totaling $10,000 and balances of $2,000, your ratio is 20%. If you then close an unused credit card with a limit of $6,000, dropping your total credit limit to $4,000, with $2,000 in debt, then you just increased your ratio to 50%—“and that’s a bad thing to a mortgage lender,” according to realfx.com.
3. Don’t switch jobs.
Mortgage lenders want to see a steady employment history. In many cases, they will require steady employment for at least the past two years. “If you make a major career change, or if your income decreases from your previous position, you could hit some snags during the underwriting process,” according to homebuyinginstitute.com.
If life’s circumstances require you to switch jobs, a new one in the same field at or above your current salary looks better to a lender than, say, a new job in a different field, or starting your own business.
4. Don’t make big deposits.
Your relatives can help you pay for your down payment, but there are rules related to down payment gifts, according to smartasset.com. “You can’t deposit the money into your account without properly documenting it. Generally, making a large deposit into your bank account prior to visiting a mortgage lender won’t look good. Lenders normally want to see that you have plenty of money in your account that’s been there for at least two months.”
5. Don’t miss payments.
This relates to your credit score because missing payments or making late payments can negatively affect your score. And credit scores are a big piece to the home loan process for lenders. If they see that you have a history of making late payments, they might assume you’ll make your mortgage payments late, too.
Your best first step: Seek expert advice
Obtaining a mortgage is one of the biggest financial decisions people make, but that doesn’t mean it has to be a stressful experience. The best thing you can do as a prospective homebuyer is to connect with a mortgage expert who can guide you through the do’s and don’ts so you’ll be in the best position to buy a home.
NEA's MBC, from time to time, may enter into media services agreements with one or more mortgage lenders in which NEA's MBC is paid to provide advertising space and related services to the lenders, so that the lenders may advertise their residential mortgage loan offerings to Members and Family. NEA's MBC has entered into such an agreement with Bank. Bank's advertising is not, and should not be construed as, an endorsement of, or referral to, Bank by NEA's MBC. You are free to use any mortgage lender you choose. The Bureau of Consumer Financial Protection, among others, encourages shopping for mortgage lending services.