When you’re in the process of getting a mortgage and closing on a house, you’ll want to avoid making any major changes to your finances. That’s because doing so could impact your credit score and your chances of loan approval, potentially derailing your home closing. Here are some tips to help you avoid a closing mishap.
6 common mistakes that prevent closing on a mortgage
1. Making a big purchase, including furniture
If you’re about to close on a house, you might’ve heard that you should limit your spending and avoid buying expensive items. But what is considered a big purchase during underwriting? A new car or boat would certainly raise red flags with lenders. Even furniture or appliances — basically anything you might pay for in installments — is best to delay until after you finalize your mortgage.
Depending on your credit score and history, these transactions can lower your score, which can impact the interest rate and loan amount you receive. This could result in a higher interest rate for the next 15 or 30 years, or even having to come up with a larger down payment.
Bottom line: Wait to purchase a big-ticket item, because “this can ruin their chances of staying qualified for a loan,” says Patricia Martinez-Alvidrez, senior escrow officer at Clear Title in El Paso, Texas.
How soon after closing can I buy furniture?
Once you’ve gone through all the closing day formalities, feel free to pick up that sofa or dining room set you’ve had your eye on.
2. Opening a new line of credit
It’s not just big purchases that can alter your credit score. Opening a new credit card or closing an existing one can affect your standing, too. Before your mortgage closing, lenders assess the credit risk they are taking on and evaluate that risk for each loan applicant. It’s especially important to protect your credit score if it’s low enough that you’re on the margins of qualifying for a mortgage. Any changes in that case can work against you and might make it impossible to finalize the loan.
3. Switching or quitting your job
Another major mistake to make when you’re about to close on a home purchase is changing jobs. This is because mortgage lenders examine your employment history for consistency. Plus, providing extra employment documentation to a lender can delay the closing. Keep in mind, too, that if you’re getting a mortgage while on maternity leave, you might need to take a few extra steps to prove your employment to your lender.
If you have any control over your job situation, it’s best to stay put until after you close. A borrower who quit their current job might have to wait a couple of weeks before they can attempt to close again.
4. Disrupting the timeline
Closing on a mortgage is time-sensitive. Even if you’ve locked in your rate, that only guarantees things for so long. It’s important to keep on top of the schedule and make sure to submit all of your paperwork on time. Otherwise, you risk losing the terms you agreed to and could have to restart the process.
5. Taking out a personal loan
If you get a personal loan or co-sign a loan for someone else, you could also face hiccups before closing day. In some cases, the lender might turn you down for a loan altogether, even if you were previously preapproved.
It all depends on how your credit score and debt-to-income (DTI) ratio is impacted. A good DTI, in particular, is a critical factor in mortgage approvals. Lenders consider two types of DTIs:
-
Front-end DTI: Your monthly mortgage payment, including principal, interest, taxes, insurance and association fees divided by your monthly income
-
Back-end DTI: The sum of all your monthly debt payments divided by your monthly income
Depending on the amount of the loan payment, your back-end DTI could increase to a percentage that the lender is unwilling to accept. If your credit score is right above the minimum to qualify for a mortgage, a hard inquiry from applying for a personal loan could drop it enough to make you ineligible. Either way, there’s a chance you’ll be forced to walk away from the deal.
6. Forgetting to pay bills
Buying a home can be stressful and all-consuming, which can lead to slip-ups in other areas of your finances. If you miss a bill payment, it can appear on your credit history and lower your score.
Note that a late payment is not the same as a missed payment. A late payment is any payment made after the due date but before the next billing cycle. A missed payment is one that’s typically over 30 days late. Many bills come with a grace period where you can make the payment late without any fees or negative credit consequences. However, if you miss the payment and it’s reported, it could have a significant negative impact on your credit score.
Bankrate insight
To avoid missing a payment, consider enrolling all of your bills in autopay. If you’d rather not do that, put your bill due dates on your calendar as reminders. By paying all of your bills on time, you can avoid mistakes that could affect whether you get a mortgage or how good of a mortgage offer you get.
What to expect before closing on your home
In the days leading up to the closing, your lender will start preparing the closing disclosure. You’ll receive this document at least three business days before you close. It provides a summary of the loan, including:
-
The home’s purchase price
-
All origination fees to be paid by the buyer
-
Interest rate on the loan
-
Closing costs
The closing disclosure will outline the exact amount of your closing costs. Plan on bringing a cashier’s check, which is a check that shows the funds are guaranteed by a bank or a credit union, to cover these costs.
Even if you’re buying a brand-new house, you should do another walkthrough to ensure it’s still in good condition or that any requested changes or repairs were made.
The buyer’s lender will talk with the real estate agent so they can plan a closing time for all the parties.
“Once you go to the title company to execute all the required documents in the presence of a notary public, and the seller has executed their portion of the documents as well, the escrow officer will forward all the closing documents to the buyer’s lender,” says Martinez-Alvidrez. “Once the buyer’s lender verifies everything was executed and initialed correctly, they will authorize the title company to finalize the transaction and disburse funds once they have the wire transfer from the lender. That’s when the buyer can obtain his/her keys.”
Closing process FAQ
Read the full article here
