Almost three-fourths of Americans believe that homeownership is part of the American Dream, according to Trulia. But that dream can turn into a nightmare if you’re not careful during the mortgage process.
A mortgage is a big commitment, both on your part and the part of the lender. So, don’t be surprised if they scrutinize every move you make once you’re under contract on a home. This article discusses common mistakes to avoid so that you can get into the home you want without any problems.
1. Don’t make random, undocumented deposits into your bank account
If you’re still saving up for your down payment, make sure you can document where the money is coming from.
“Lenders care about large deposits because, in the past, folks claimed their down payment cash was all theirs when, in fact, it was borrowed,” says Casey Fleming, a mortgage adviser and author of “The Loan Guide.” “Because they didn’t have skin in the game they were less inclined to tough it out when the market turned,” leading to foreclosures.
So, there’s no issue with depositing large amounts of cash into your bank account to use for the down payment. You’ll just need to make sure you have a paper trail of where it came from.
2. Don’t buy a new car or trade up on your lease
Applying for credit or a new car lease can reduce your credit score. It also introduces a new monthly payment that could affect your ability to make the mortgage payment.
A change to your credit score and debt-to-income ratio could increase your interest rate. And if you just barely qualified for the mortgage program when you first applied, the change could disqualify you completely.
3. Don’t quit your job to change industries
If you’re planning on switching jobs, make sure it’s in the same industry. Even if a new job in a different industry pays better, you’re better off waiting until you close on the house before starting.
“If you are an engineer and go into technical sales with commission-based bonus,” says Fleming, “the lender isn’t able to document that you have the demonstrated ability to earn money that way, and can’t count your income.”
4. Don’t quit your job to start a business
The idea of being your own boss can be tempting, but you should avoid the transition from a steady job to small-business owner when buying a house. Even if you can make a good income quickly, the lender won’t be able to count it.
That’s because business income can be volatile. Without the stability of a regular salary or wage, lenders see that volatility as a risk. They’ll typically use the last two years of your tax returns to calculate your business income.
5. Don’t transfer large sums of money between bank accounts without documentation
Again, documentation is key when it comes to your money trail. Transferring large sums of cash back and forth between bank accounts can make it harder to trace that trail. If you’re having a hard time tracing the money back to its origin, the lender may not allow you to use it for the down payment.
6. Don’t open new credit cards
There are some great credit cards out there with enticing sign-up bonuses, rewards and other features. But getting a few hundred dollars for signing up for a credit card could cost you your mortgage.
As with buying a new car or trading up on a car lease, applying for a credit card affects your credit score and debt-to-income ratio. A credit card also introduces a new revolving credit line, which represents an even bigger risk if you end up maxing it out.
So, if you’re a credit card enthusiast, wait until after your mortgage is settled before taking advantage of new credit card offers.
7. Don’t accept a cash gift without filing the proper paperwork
There’s nothing wrong with getting help with your down payment. If you do, though, the person giving you the money needs to provide a letter for your lender with the following information:
- The donor’s name, address and phone number
- The donor’s relationship to you
- The dollar amount of the gift
- The date they transferred the funds to you
- A statement that you are not expected to repay the gift
- The address of the house you’re buying
- The donor’s signature
Depending on the lender, the donor may also need to provide bank statements to prove the gift came from their bank account. If you can’t provide a gift letter or, if requested, prove the money came from the donor, you probably won’t be able to use the money for the down payment.
8. Don’t cosign on any debt with anyone
If you have a loved one who needs help applying for a loan or credit card, acting as a cosigner to guarantee repayment can help them get approved. It can also stop the approval on your mortgage.
When you cosign, you’re equally responsible for the debt your loved one incurs. The application will also affect your credit, and the loan or credit card will show up on your credit report.
Make your mortgage your top priority
When you begin house hunting, shop around for a mortgage before settling on a lender. Once you begin applying, make sure you understand what the lender’s expectations are during the process. The lender will check your credit and bank statements again before closing, so there’s no use in trying to deceive them.
As you follow the lender’s rules throughout the mortgage process, your dream of becoming a homeowner can become a reality.
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.