If you are a first-time homebuyer or looking for a move-up home, then a mortgage pre-approval process is most likely in your future. If you are not in the position to pay cash (like the majority of buyers), a loan makes the dream of homeownership accessible to you.
Borrowers who are well-prepared and financially qualified have maximized their chances of mortgage approval by optimizing figures like their credit score and debt-to-income ratio. However, even the most careful of buyers can make simple mistakes that can destroy the deal.
Thankfully, Adam, the Controller of the accounting department at Marketplace Homes, shared some of the top mortgage pitfalls that jeopardize home loan approvals.
When you’re well prepared and informed, you can increase your chances of loan approval. So, what are the mistakes that people often make and how can you avoid them? Here are the top 10 mortgage loan pitfalls people make during the application process.
Top 10 Mistakes That Block Mortgage Approvals
You have prepared your finances and are ready to buy your dream home. Now that your goal is in sight, don’t relax just yet. When people let down their guard, they can make these 10 simple mistakes which can become barriers to your loan officer approving your loan.
#1 Your top dollar is too high.
- Solution: Pick a reasonable top dollar.
It’s risky to approve a loan that treads the line of one’s financial comfort zone. For instance, if you keep on pressing to be approved for a loan amount that is difficult for your income to handle. During the underwriting process, loan officers determine whether you can afford the loan within the context of other existing debts. If you want a new home that is too expensive for your budget, you may not get the pre-approval you need to move forward.
Here is a great way to make sure your mortgage application doesn’t cross the line. If you have two incomes, you can base your loan off one income so that if anything unforeseen happens, you can still confidently pay your mortgage with one working partner. Higher top dollars are less likely to be approved if your income is barely enough to cover the monthly mortgage payment plus extra bills.
#2: You open too many accounts.
- Solution: Don’t open or close credit card accounts frequently.
When you’re checking out at your favorite clothing store and the cashier asks you to open a credit card to get 20% off, just say no. That immediate savings you’re getting on sweaters will turn into regret when the new credit account lowers your credit score during the approval process. The older your credit history, the better, and new accounts create a lower average age. More reliable credit reports have older, more established credit.
- P.S. Adam also recommends never closing your credit accounts, since a low credit utilization rate is beneficial. This figure is calculated by dividing your current debt balance by total available credit. A good utilization rate is below 30%.
#3: You have too much “cash in and out” in the bank.
- Solution: Limit your bank activity, especially after you apply for a loan.
Extremes are red flags to lenders. If your bank accounts have massive fluctuations in numbers, it can make you look less reliable. Having enough money in the bank, consistently, ensures your mortgage lender you have enough to cover closing costs and your future mortgage payments. This mistake is easy to avoid: Just keep the number in your bank account consistent during the loan approval process.
#4: You make large purchases during the loan application phase.
- Solution: Please don’t buy a car, or a boat, or anything large that involves a hard credit check during the mortgage process.
Big purchases usually involve a hard credit check if you need financing. This can take a hit on your good credit by lowering your score temporarily. But don’t you’re off the hook if you use cash. Remember that in tip #3, changing the number in your bank account during the homebuying process can also make qualifying more difficult. So, either way, big purchases hurt you. Don’t do it!
#5: You quit your job during application season.
- Solution: Don’t quit your job after you apply for a loan.
If a new venture is calling you, exercise some patience. Right now, it’s time to put your head over your feelings and keep your income stream active. Even though some people can save the deal by getting a new job immediately and reporting their income, instability like this unravels lender confidence.
If you become unemployed, even temporarily, during the pre-qualification or pre-approval period, you can lose your chance of approval. This is a common mortgage mistake that is so easy to avoid. Just endure, put out those applications, and patiently wait to change jobs after your home purchase is complete.
#6: You Don’t Have Enough Cash in The Bank.
- Solution: Put cash in the bank for months prior to the application period to establish a history of having enough money.
A large cash balance increases approval chances with your mortgage broker. Have money in the bank for at least 3 months prior to the loan approval. This is because lenders typically want statements that reach back to three months’ worth of bank activity.
If you can establish a history of healthy bank balances beyond three months, that’s even better. Even if you want to pay all cash for your home, it’s important to save money in the bank so you can present proof of funds for your upcoming real estate transaction.
#7: Your credit score is too low.
- Solution: Work on your credit score before applying for a loan.
Credit scores are influenced by a variety of factors such as age of credit, payment history, number of accounts, used credit, and much more. With a higher credit score, you can get lower mortgage rates which make monthly payments more affordable.
Improve your credit score to get above the 700s for the best possible qualification chances. For more information, this article by NerdWallet (one of my favorites) explains some effective ways to increase your score.
#8: Your debt-to-income ratio is too high for mortgage approvals.
- Solution: Lower your DTI before applying.
Your debt-to-income ratio is a critical financial fitness factor in the lender’s eyes. Aim for the lowest possible ratio to increase your monthly margin. This means that you should diligently pay off debt so that you don’t max out the available credit you have.
This shows lenders that you have the ability to consistently pay a mortgage payment with money, not more credit — a must-have for a responsible homeowner.
#9: You make significant changes to your investment accounts.
- Solution: Don’t play around with your investment accounts during the loan period.
It’s hard to hold back when you see an opportunity to sell high on a stock, but too much cash in and out with your investments can also hurt your prospects. Try to make small movements to not alarm your lender. Closing some positions might be necessary to help with the next step, but also be aware of potential tax burdens from your recognized gains.
#10: You offer no down payment or a low down payment.
- Solution: Get more cash to close through saving more, personal loans, or freeing equity.
The larger the down payment, the easier it is to get approved. This proves your readiness and can eliminate private mortgage insurance (PMI) while lowering your mortgage interest rate. Freeing equity through our Sell & Stay program is a great way to get money to close while erasing the home sale contingency when buying new construction. Talk about a win-win!
Mortgage Pitfalls to Avoid
When you follow these 10 steps, you can build a financial profile that is strong enough to qualify for a mortgage. If you need assistance with getting cash to eliminate home sale contingencies or to make your down payment competitive, then our special incentive programs can help you. Contact us today to find out more.
