What Not to Do When Applying for a Mortgage

Securing a mortgage is a major financial undertaking, requiring careful consideration of financial activities. Minor financial decisions can inadvertently create obstacles to loan approval. Understanding potential pitfalls and exercising diligence throughout the mortgage application helps ensure a smoother path to homeownership. Lenders evaluate financial stability and creditworthiness, so awareness of their criteria is important for borrowers.

Managing Your Financial Standing

Changing employment status during the mortgage application process can impact a lender’s assessment of income stability. Lenders require a consistent two-year employment history in the same field or industry to establish a reliable income stream. A transition to a lower-paying position, self-employment, or a different industry can raise concerns about future repayment capacity. This may lead to additional documentation requests or even loan denial. Lenders verify employment through pay stubs, W-2 forms, and direct contact with employers.

Making large, unexplained cash deposits into bank accounts can complicate asset verification. Mortgage underwriters must source funds used for down payments and closing costs. Undocumented cash deposits, such as those not from the sale of an asset or a legitimate gift, can be viewed suspiciously. These funds may need to undergo “seasoning,” requiring them to be in an account for at least 60 days. This ensures the funds are truly the borrower’s and not borrowed money.

Frequent changes in bank accounts or transfers of funds between accounts can create challenges during the underwriting process. Underwriters require a clear and consistent paper trail to verify the origin and stability of assets. Such movements can obscure the source of funds or suggest instability, prompting additional inquiries. This may delay the loan approval timeline. Maintaining consistent banking relationships simplifies the asset verification process.

Co-signing loans for other individuals introduces a contingent liability that lenders must consider. The debt from a co-signed loan will be factored into the borrower’s debt-to-income (DTI) ratio, even if payments are not directly made by the borrower. This can elevate the DTI beyond acceptable limits. For conventional loans, DTI often falls within the 43% to 50% range, potentially disqualifying the borrower from mortgage approval.

Large, non-essential cash withdrawals that deplete financial reserves can pose a problem. Lenders assess a borrower’s ability to cover the down payment, closing costs, and post-closing reserves. These reserves often include two or more months of mortgage payments. Withdrawals reduce available funds, signaling a diminished capacity to meet these financial requirements. Maintaining adequate liquid assets is an important component of a strong mortgage application.

Handling Your Credit and Debt

Opening new lines of credit, such as credit cards, car loans, or personal loans, during the mortgage application period can negatively impact a borrower’s credit profile and debt-to-income ratio. Each new credit application results in a hard inquiry on a credit report, which can temporarily lower a credit score. New debt obligations increase monthly payments, directly raising the DTI ratio and potentially pushing it above lender thresholds.

Closing existing credit accounts can have an unintended negative effect on a credit score. While it might seem beneficial, closing an older account can shorten the average age of a borrower’s credit history. If balances remain on other cards, closing an account can increase the overall credit utilization ratio. Lenders prefer to see utilization below 30% as a sign of responsible credit management.

Making large purchases on credit, such as furniture, appliances, or a vehicle, before the mortgage closes can alter a borrower’s financial standing. Financing these items adds new monthly debt payments and increases credit utilization. This immediate change can cause the DTI ratio to increase. This may lead to the borrower no longer qualifying for the previously approved loan amount or even disqualifying them entirely.

Missing bill payments or making late payments on any existing accounts can damage a credit score and signal increased risk to lenders. A single payment reported as 30 days or more past due can cause a significant drop in credit scores. Payment history accounts for approximately 35% of a FICO score. Timely payments are important for maintaining a strong credit profile during the mortgage process.

Maxing out credit cards or increasing credit utilization negatively impacts credit scores. High utilization ratios suggest financial strain and can deter lenders who view this as an indicator of potential default. Maintaining low balances relative to credit limits demonstrates responsible credit management, which is favorable to mortgage underwriters.

Navigating the Application Process

Misrepresenting information on a mortgage application, whether concerning income, assets, or debts, carries consequences. Mortgage fraud is a legal offense, and lenders conduct thorough verification processes that often uncover discrepancies. Any false statements or omissions can lead to immediate application denial. In some cases, this may result in legal penalties and a permanent record that could prevent future loan approvals.

Ignoring requests for documentation or delaying responses to the lender can prolong the underwriting process. Mortgage applications require substantial paperwork, including tax returns, bank statements, pay stubs, and employment verification. Timely submission of all requested documents is important for the loan to progress efficiently. Delays can jeopardize locked interest rates or lead to the cancellation of the loan application if deadlines are missed.

Making significant financial moves without consulting the lender is an action to avoid. Selling assets, receiving large monetary gifts, or taking on new substantial debts can alter a borrower’s financial profile. Lenders must verify all financial changes to ensure the borrower still meets qualification criteria. Gift funds, for instance, often require a specific gift letter and verification of the donor’s funds to ensure they are not disguised loans.

Applying for multiple mortgages simultaneously with different lenders after receiving an initial pre-approval can be problematic. While it is common to compare initial pre-approvals from a few lenders, pursuing multiple new mortgage applications simultaneously once a primary application is underway can result in multiple hard inquiries. This can negatively impact credit scores and may raise red flags for underwriters. This suggests potential financial instability or an attempt to secure multiple loans.