What Not to Do During the Mortgage Process

The mortgage application process represents a major financial undertaking, and the period between initial application and final closing is particularly sensitive. During this time, minor decisions can have major consequences, jeopardizing loan approval or delaying the home purchase. Understanding this phase is important for a smooth transaction.

Protecting Your Credit Profile

Engaging in new credit activities during the mortgage process can harm your financial standing. Applying for new credit, such as a credit card or an auto loan, triggers a hard inquiry on your credit report, which can temporarily lower your credit score. These inquiries, along with changes to your average age of credit, are factors lenders monitor. Such changes might lead to a higher interest rate on your mortgage or even affect the loan amount you qualify for.

Making large purchases on existing credit accounts, like buying furniture or appliances, presents challenges. This increases your outstanding debt and credit utilization ratio, impacting your debt-to-income (DTI) ratio. Lenders use the DTI ratio to determine your capacity to manage additional debt. Even if a large purchase has a promotional 0% interest rate, the minimum monthly payment associated with it reduces the income lenders consider available for your mortgage payment.

Co-signing for another person’s loan or line of credit can affect your mortgage eligibility. When you co-sign, the debt is added to your DTI ratio, regardless of whether you are making the payments. A heightened DTI ratio can make it difficult to qualify, as lenders view this as an increased financial obligation. While it is possible to provide documentation proving the primary borrower has made consistent payments for at least 12 months, this requires effort and verification.

Closing existing credit accounts is detrimental. While it might seem like a way to reduce perceived debt, closing accounts can negatively impact your credit utilization ratio and shorten your credit history. Lenders evaluate the length of your credit history. Maintaining established accounts, especially those with a history of timely payments, benefits your credit profile.

Timely payments on all existing debts are important throughout the mortgage process. Payment history accounts for a significant portion of your credit score, approximately 35%. A payment becomes officially “late” when it is 30 days past due and is then reported to credit bureaus. Even one or two recent late payments within the past 12 months can be viewed unfavorably by mortgage underwriters, leading to delays or denial of your loan application.

Safeguarding Your Financial Accounts

Managing your financial accounts is important during the mortgage application. Lenders require a clear paper trail for all funds intended for the down payment and closing costs. Making large, undocumented cash deposits into your bank accounts can raise concerns because the source of these funds cannot be easily traced. Lenders require funds to be “seasoned,” meaning they have been in your account for a specified period, commonly 60 days, to ensure legitimacy.

Transferring large sums of money between different bank accounts complicates the verification process. While permissible if all accounts are in your name and fully documented, such movements can create scrutiny for lenders. To avoid delays, it is advisable to keep funds intended for the mortgage in the accounts where they are already seasoned. Providing statements for all accounts involved in transfers helps maintain transparency.

Changing bank accounts or liquidating assets, such as investments or retirement funds, without lender discussion can lead to complications. Lenders need to verify the existence and source of all assets. If you liquidate assets, you need to provide statements from the original accounts to demonstrate funds were yours and seasoned. This ensures funds are not from undisclosed or unverified sources.

Avoid using funds earmarked for your mortgage—such as your down payment or closing costs—for other purposes. Lenders verify your available funds just before closing to confirm liquidity. Diverting these funds for other expenses can leave you short at closing, delaying or derailing the home purchase. Maintaining dedicated funds is important for a smooth closing.

Maintaining Employment Stability

Maintaining consistent employment and income is an important factor in mortgage approval, as lenders assess repayment ability. Changing jobs during the mortgage process, particularly to a different industry or pay structure, can trigger a re-evaluation of your application. Lenders verify employment at application and again before closing, and a new job may introduce uncertainty. If your new role includes a probationary period, lenders may view this as a risk, delaying approval until the probation concludes.

Resigning from your current job or accepting a significant pay cut impacts income stability, which is a key criterion for lenders. Your income influences your debt-to-income ratio and capacity to make monthly mortgage payments. Lenders require consistent, verifiable income, requesting pay stubs for the past 30 days and W-2 forms for the last two years. Any reduction in income can alter the loan amount for which you qualify or lead to denial.

Starting a new business or becoming self-employed during the mortgage application process complicates income verification. Self-employed individuals face stricter documentation requirements. Lenders require two years of business tax returns, along with profit and loss statements, to assess income stability. This contrasts with the more straightforward verification process for salaried employees, causing delays.

Taking an extended leave of absence or reducing your working hours impacts verifiable income and raises repayment concerns. Lenders need to confirm that your current income is stable and sufficient to cover the proposed mortgage payments. Any change that diminishes your regular earnings during this period will necessitate scrutiny and documentation, affecting the underwriting process. It is advisable to postpone such changes until after the mortgage has closed.

Engaging Effectively with Your Lender

Transparent communication with your mortgage lender is important throughout the application process. Withholding information or providing inaccurate details can lead to delays or even denial of your loan. Lenders conduct thorough reviews of your financial situation, and discrepancies can raise red flags requiring investigation. Full disclosure from the outset helps build trust and streamlines the process.

Ignoring requests for documentation from your lender is a frequent cause of mortgage delays. The underwriting process requires various documents, including updated pay stubs, bank statements, and tax returns. Promptly providing requested items is important for meeting deadlines and avoiding setbacks. Delays in submitting documentation can cascade, impacting closing timelines.

Making assumptions about permissible financial actions without consulting your loan officer can lead to complications. For instance, assuming a large cash transfer between accounts is acceptable without informing your lender could create issues with fund seasoning or verification. Your loan officer can provide guidance tailored to your situation and lender’s requirements, helping you navigate pitfalls. Proactive communication about any planned financial changes is recommended.

Changing your contact information without immediately notifying your lender can disrupt the communication flow. Lenders need to reach you for updates and disclosures. Ensuring your contact details are current with your lender helps prevent communication breakdowns that could delay mortgage approval and closing.