Things Not to Do When Applying for a Mortgage

The mortgage application process involves complex steps where minor errors can lead to delays, less favorable terms, or denial. This article guides readers through common pitfalls to avoid before and during the application, contributing to a smoother path toward homeownership.

Credit Profile Missteps

Engaging in certain financial actions during the mortgage application period can negatively impact your credit profile. Applying for new credit, such as a car loan or credit card, often generates a hard inquiry that can slightly lower your credit score. New debt also directly increases your debt-to-income (DTI) ratio, a key factor lenders use to assess repayment capacity.

Closing existing credit accounts might seem beneficial, but it can harm your credit score. Closing accounts can increase your credit utilization ratio by reducing total available credit, even if balances remain unchanged. Additionally, closing older accounts can shorten the average age of your credit history. A diverse mix of credit is generally viewed positively.

Making late payments on any existing debts, including credit cards, student loans, or car loans, can severely damage a credit score. A payment must be at least 30 days past due for a lender to report it to credit bureaus, and even a single reported late payment can remain on a credit report for up to seven years. High credit utilization, where a significant portion of available credit is being used, also negatively impacts credit scores; maintaining balances below 30% of the credit limit is generally advised.

Co-signing a loan for another individual, such as a car or student loan, can affect your mortgage application. The co-signed debt is typically included in your DTI ratio, as you are legally responsible if the primary borrower defaults. This can impact your ability to qualify for a mortgage.

Financial Stability Disruptions

Maintaining financial stability throughout the mortgage application process is key, as lenders rigorously verify income, assets, and overall financial health. Changing employment or salary can disrupt this assessment, as lenders typically verify employment status and income at multiple stages, including just before closing. A job change, especially one involving a different field, lower pay, or a shift to commission-based income, can lead to re-verification issues or even denial. Lenders prefer to see at least two years of consistent employment; new positions with probationary periods can raise concerns.

Large, unexplained cash deposits into bank accounts can raise red flags for lenders. Financial institutions require a clear paper trail for all funds intended for a down payment or closing costs. Unverified cash deposits can be viewed suspiciously, as they lack a traceable source and may suggest undisclosed loans or liabilities that could impact the debt-to-income ratio. Lenders need to ensure that funds are “seasoned,” meaning they have been in the account for a period and are not recently borrowed money.

Large, unexplained withdrawals from bank accounts or the liquidation of significant assets, such as selling stocks or mutual funds, without prior discussion with the lender can cause issues. Such actions reduce the available funds for the down payment and closing costs, triggering additional scrutiny from the lender. Maintaining consistent and transparent financial activity is generally recommended during this period.

Purchasing major items on credit or with cash, such as a new car, furniture, or appliances, before closing on a mortgage can jeopardize the loan. These purchases can increase your overall debt, reduce available savings, and negatively impact your debt-to-income ratio. New financial obligations can lead to a denial if your financial profile no longer meets the lender’s qualification criteria.

Taking on new personal loans, lines of credit, or other forms of debt further impacts your debt-to-income ratio. New debt directly affects the calculation lenders use to determine your ability to manage monthly mortgage payments. This can push the DTI ratio above acceptable limits, making it more challenging to qualify for the desired mortgage amount or terms.

Application Accuracy and Responsiveness

Accuracy and responsiveness are key throughout the mortgage application process. Misrepresenting income, assets, or debts on the application can have severe consequences. Providing false information, whether intentional or unintentional, constitutes mortgage fraud, a federal offense. Discovery of misrepresentation will likely lead to immediate denial, or if uncovered after closing, can result in the lender demanding full repayment or initiating foreclosure.

Omitting information about outstanding debts, previous bankruptcies, or other owned properties is problematic. Lenders conduct thorough background checks and property searches, and they will uncover any discrepancies. Such omissions erode trust and signal a lack of transparency, leading to the denial of the application. Maintain complete honesty about all financial obligations and assets.

Delays in providing requested documents can prolong the approval process. Mortgage lenders operate under strict timelines, and failing to submit required paperwork promptly can cause you to miss deadlines. Prompt submission of all requested financial statements, tax returns, and other documents helps keep the application moving forward efficiently.

Ignoring communications from the lender or loan officer can impede progress. Lenders often need clarification or additional information to process an application. Promptly responding to questions and requests helps resolve issues and prevents unnecessary delays. Maintaining open and timely communication ensures the application remains active and on track.

Changing bank accounts or frequently moving funds between accounts during the application period can complicate asset verification. Lenders require a stable and traceable financial history to confirm the source and availability of funds for the down payment and closing costs. Frequent account changes make it difficult for underwriters to follow the money trail, potentially delaying loan approval.

Procedural Errors and Oversights

Overlooking procedural steps or making certain major changes can create hurdles during the mortgage application process. Skipping the pre-approval process, for instance, can put you at a disadvantage. A pre-approval provides a realistic understanding of the maximum loan amount you qualify for, which helps in setting a home-buying budget. It also strengthens offers made to sellers, demonstrating that you are a serious and qualified buyer, and can streamline the later stages of the application by identifying potential issues early.

Failing to compare loan offers from multiple lenders can result in higher interest rates and less favorable terms over the life of the loan. Shopping around and obtaining Loan Estimates from several lenders allows you to compare fees, interest rates, and overall costs.

Overlooking or misunderstanding closing costs can create a financial surprise just before closing. These expenses, which typically range from 2% to 6% of the total loan amount, are due at closing in addition to the down payment. Closing costs can include various fees such as:
Loan origination fees (0.5% to 1% of the loan amount)
Appraisal fees
Title insurance
Recording fees
Attorney fees
Prepaid items like property taxes and homeowner’s insurance premiums
Not budgeting for these additional costs can lead to a last-minute financial crunch.

Neglecting to review all loan documents carefully before signing can result in unfavorable terms or unexpected fees. Thoroughly understand every term, condition, and fee outlined in the loan documents, including the Loan Estimate and Closing Disclosure, to avoid surprises. Seeking clarification on any unclear clauses before signing is advisable.

Making major life changes, such as getting married or divorced, or having a child, during the application process without informing the lender can impact the loan. These events can affect your debt-to-income ratio, marital status, or financial dependents, necessitating updated documentation and potentially a re-evaluation of loan qualification. Be transparent with the lender about such changes.

Changing insurance providers or allowing current insurance coverage to lapse after loan approval but before closing can cause issues. Lenders require continuous homeowner’s insurance coverage for the property to protect their investment. Any lapse or change in policy without proper notification and approval can delay or even jeopardize the closing process.