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Before you close on your mortgage, it’s critical to avoid taking steps with your finances that could derail the closing process. Making major changes to your credit or job situation, for example, can change your financial profile as a borrower and can delay the closing as a result. This also applies to borrowers refinancing their mortgages.
5 common mistakes that prevent closing on a mortgage
There are some major no-nos to avoid when you’re closing a mortgage, but the key thing to remember is that any big changes to your overall financial situation, like making another big purchase, quitting or changing jobs or changing your credit, can all delay finalizing your loan. Here’s the dos and don’ts.
1. Making a big purchase, including furniture
If you’re about to close on a house, it’s probably not the best time to get a new car, boat, personal aircraft or other expensive toy. Even furniture or appliances — basically anything you might pay for in installments — is best to delay until after your mortgage is finalized.
Depending on your credit score and history, these transactions can lower your score, which can impact the interest rate and loan amount you could 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: Borrowers should wait to purchase a big-ticket item, because “this can ruin their chances of staying qualified for a loan,” says Patricia Martinez-Alvidrez, business development officer for Stewart Title in El Paso, Texas.
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. In the runup to your mortgage closing, lenders make an assessment of the credit risk they are taking on and go through several steps to assess that risk for each loan applicant, says Rutger van Faassen, vice president of consumer lending at Informa Financial Intelligence, a Boston-based financial products and services company.
“Overall, you want to keep your financial household in order and stable while you are going through a mortgage application and closing process,” van Faassen says. “Anything that creates uncertainty for the lender will weigh on their underwriting decision and anything that looks out of order will raise questions.”
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 at the start of the process. Any changes in that case can work against you and might make it impossible to finalize the loan.
3. Switching or quitting your job
Obviously, this can be a tall order during a pandemic and economic downturn, but another major mistake is changing jobs. This is because mortgage lenders examine your employment history to determine if there’s a history of steady jobs and income. Providing additional documentation on employment to a lender can delay the closing.
“When the lender needs to verify your employment, it is easiest if they can call an employer that can confirm that you have been employed there for a while,” van Faassen says. “Getting that confirmation from a brand-new employer or even a prospective employer complicates the situation and can raise additional questions, which then takes more time in the underwriting and verification process.”
If you have any control over your job situation, it’s best to stay put until after you close. A borrower who quits their current job may 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 all of your paperwork is submitted on time. Otherwise, you risk losing the terms you agreed to and could have to start the process over again.
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 getting to the closing table. In some instances, the lender may turn you down for a loan altogether even if you were previously pre approved.
It depends on how your credit score and debt-to-income (DTI) ratio is impacted. 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. Or if your credit score is right above the minimum to qualify for a mortgage, a hard inquiry that results from applying for a personal loan could drop it to a point that makes you ineligible. Either way, there’s a chance you’ll be forced to walk away from the deal.
Tips to prepare to buy a home
Several months before you start looking for a mortgage to buy a home, here are some steps to take:
Review your credit reports for mistakes. Errors can occur if you’ve moved, a company incorrectly reported a payment as late or mixed up the information of another person with your own, for example. You can dispute any mistakes, but it can take several weeks for the credit bureau agencies to update your report.
“Make sure your credit score is the best it can be by tracking it for a while before you decide to buy a home and to make sure no negative issues like missed payments or taking on additional debt arise,” says van Faassen.
The three credit bureaus, Experian, Equifax and TransUnion, provide a free copy of your report once a year. You can obtain it at AnnualCreditReport.com.
Determine how much you can spend on a house to help narrow down the search. Once you know this, it’s important to figure out how much your down payment will be and if you have enough money saved for the amount.
“Ideally, you have this money set aside in a savings account to have it ready when you get to buying a home,” van Faassen says.
If your parents or another family member is going to give you money for the down payment, make sure they do so at least three months before you start applying for mortgages. Generally, lenders want to see a history or that it has been in your savings account for at least 90 days.
Decide if you want to get preapproved for a mortgage or prequalified once you’re closer to choosing a home to buy. Being prequalified is not a formal process and it means that you are likely to be approved for a mortgage if you were to apply. On the other hand, receiving preapproval for a mortgage is a firm commitment of credit from the lender.
What to expect before closing on your house
In the days leading up to the closing, your lender will start preparing the closing disclosure, Martinez-Alvidrez says. This document will be provided to you at least three days before you close.
The closing disclosure includes the exact amount of the 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 of the house to make sure it is still in good condition or that any changes or repairs that you asked for were made, as well.
The buyer’s lender will communicate with the real estate agent so they can coordinate 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,” Martinez-Alvidrez says. “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.”
Summary of what not to do before closing on a mortgage
It’s not always smooth sailing when going from the mortgage application process to the closing table. However, there are actions you can steer clear of to minimize roadblocks and ensure your loan closes on time. You also should review your credit report, scores and identify ways to optimize your financial health to give yourself the best chance at securing a mortgage with competitive terms.