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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 can delay the closing on your house because lenders track any changes that are made by consumers after they apply for a mortgage and before it closes. This also applies to consumers refinancing their mortgages. Here are some tips for a hassle-free closing on your mortgage.
Mistakes to avoid before closing on a home
Before you have closed your mortgage and signed the mortgage at the title company, avoid making large purchases such as buying a car, furniture or appliances. Depending on your credit score and history, these transactions can lower your credit score and impact the rate or the amount of the mortgage 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.
Lenders are making 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,” he says. “Anything that creates uncertainty for the lender will weigh on their underwriting decision and anything that looks out of order will raise questions.”
Real estate agents and lenders will often tell buyers that they should wait to purchase big-ticket items because “this can ruin their chances of staying qualified for a loan,” says Patricia Martinez-Alvidrez, a business development officer for Stewart Title in El Paso, Texas.
Can I change jobs during the mortgage process?
Another major mistake is changing jobs. Mortgage lenders examine your employment history to determine if there is a history of steady jobs and income. Providing additional documentation on employment to a lender can delay the closing on the mortgage.
“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.”
A potential homeowner who quits their current job will have to wait a couple of weeks before they can attempt to close again, she says.
Avoid applying for a credit card or personal loan because it could impact your credit score. This could be a problem for the applicant if he/she had a credit score that is “just good enough to get approved for the mortgage,” he says. “Taking a hit to a credit score can tip the balance negatively.”
How to prepare to buy a home
Several months before you start shopping for a house, it’s a good idea to review your credit reports for mistakes. Errors can occur if you’ve moved, a company incorrectly reported a payment as late or mixed 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.
“It is always better to resolve any credit bureau issues before applying for a mortgage and not have to contest findings while you’re in the mortgage process,” he says.
Determine how much you can spend on a house, which will help you narrow down the search. Your next step is figuring how much the 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. Lenders want to see a history or that it has been in your savings account for at least 90 days.
Start researching real estate agents to find the best fit and know your rights as a consumer, says Martinez-Alvidrez.
“Remember, buyers usually don’t pay for the real estate commission and should make sure they are fairly represented by one,” she says.
There are many programs to assist homebuyers, especially ones for first-time homebuyers and veterans. They can assist with the down payment or permit a lower down payment amount.
“Research lenders in your area, talk to your local credit union or a lender that specializes in VA loans if you qualify for this type of loan and any other loan programs available to you,” Martinez-Alvidrez says.
Be sure to include other fees in your budget. Once you close on a mortgage, you are responsible for any maintenance fees or HOA dues or paying expenses such as water, garbage, a lawn mowing service or snow removal.
After you are closer to choosing a home to buy, you can decide if you want to get preapproved for a mortgage or prequalified. 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, means a firm commitment of credit from the lender.
What happens the week before closing on a house
Usually a week before closing, your lender will start preparing the closing disclosure, Martinez-Alvidrez says. This document will go out to the buyers three days before they can close at the title company.
Even if you are buying a brand-new house, you should do another walk through of the house to make sure it is still in good condition or that any changes or repairs that you asked for were made.
The buyer’s lender will communicate with the real estate agent so they can coordinate a closing time for all the parties, she says.
Does a mortgage closing disclosure mean you’re approved?
A closing disclosure means you are approved for a mortgage. You will also find out the exact amount of the closing costs so you can bring it to the closing. Plan on bringing a cashier’s check – it is a check whose funds are guaranteed by a bank or a credit union.
“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.”