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Beware of Big Financial Changes
Once you've finished with loan preapproval, getting under contract and completing the inspection and appraisal, you're just steps away from crossing the threshold of your own home.
That’s why it’s incredibly important to avoid any roadblocks at this stage. All buyers are subject to a final financial review by a lender’s underwriting team, and it's usually best to avoid any surprises.
Let’s look at this through a lender’s eyes. A lot can change between preapproval and your closing date. Income can take a nosedive. Spouses can file for divorce. Potential borrowers can take on a mountain of new debt.
Lenders will be watching carefully for any major changes that could knock a potential borrower out of contention for VA approval.
During the days ahead, protect your home purchase by steering clear of the following pitfalls:
1. Don't Make Major Purchases
Don’t make any big purchases right before buying a home. Lenders want to be assured that a buyer can continually make mortgage payments. Buyers who take on big debt like a car or new furniture might be stretching their budgets beyond a lender’s requirements. Lenders will usually receive an alert from the credit bureaus if there’s a credit inquiry on your report during the loan process. Taking on new credit before your loan closes can lead to delays or even derail the entire process. Keep your mortgage in good shape by saving those big purchases for the day after your loan funds.
2. Don't Make Big Career Changes
Losing a job or embarking on a new career path is a big red flag for lenders. A mortgage lender wants to make sure your income is consistent and that the monthly payment is manageable. Any changes to your employment and income can jeopardize your loan. Jumping to a different field or starting your own business is often a deal-breaker. Even a promotion could be problematic if, say, some or all of your income switches to a commission basis. Talk with your loan officer about any pending changes to your employment. Lenders will confirm your employment situation on or just before your closing day.
3. Don't Have Credit Problems or Inquiries
Try to avoid hard credit inquiries and credit slip-ups while you’re waiting for your loan to close. Don’t miss payments, and try to avoid applying for new credit before finalizing your mortgage. Hard inquiries could hurt your credit score and even knock you below a lender’s qualifying score benchmark. Some lenders may receive an alert from the credit bureaus if borrowers get a hard credit inquiry during the loan process. When in doubt about how to handle credit during this interim period, check with your loan officer. Lenders have a wealth of experience in this area and can provide solid guidance to keep your mortgage on track.
4. Don't Move Money Around
All transfers of money between your accounts will need to have a paper trail. Moving money around before your loan closes can lead to underwriting delays. Any deposit totaling more than 50 percent of your total gross monthly salary is typically considered a large deposit and will need a paper trail. This excludes direct deposits, paychecks, retirement, Social Security income, disability income or any other documented income.
5. Don't Remove Reserves in the Bank
If you submit your original loan application with $1,000 in the bank, lenders will want to see at least $1,000 in liquid funds all the way to closing. A large drop in your bank balance can cause problems during the processing and underwriting of your file.
6. Don’t Pack Away Documents
Until your financing is approved, your loan application should be considered a work in progress. With this in mind, your loan team will review your file continuously to ensure it’s ready for underwriting and that all documents are accurate and up to date. Don’t be alarmed if your loan officer requests additional documentation at several points along the way. Even after the first round of underwriting review, the underwriter will usually give a short “to-do list” prior to final underwriting submission. Keep in mind that each underwriter is different and may ask for more supporting documentation if they feel that what has already been provided is not sufficient.
7. Don't Close Out Any Debt Accounts
While it may seem contradictory, paying down all of your debt and closing the account can actually lower your credit score. Your credit score takes into account the age of your accounts, and the “mix” of credit accounts you have. When you close out an account, such as paying off a car loan or your student loan debt, both your age of account and mix of accounts can be impacted.
Lenders don’t want to see any major fluctuations in your credit score before closing on your home, so it’s best to try and keep your score as consistent as possible.
8. Don't Exclude Your Lending Team
Some borrowers assume that loan preapproval is pretty much the same thing as formal approval. But that’s definitely not the case. Your loan profile must remain the same (or improve) during the processing and underwriting of your loan. A small change to credit or bank balances can affect your loan approval. When in doubt or when it comes to credit or your bank accounts, talk with your loan officer before taking an action.