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Did you know making major changes to your finances could derail the closing process, and even prevent you from getting a mortgage? Avoid a closing mishap with these tips.
5 common mistakes that prevent closing on a mortgage
1. Making a big purchase, including furniture
If you’re about to close on a house, it’s not the best time to get a new car, boat or other expensive item. 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 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, 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.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
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, and providing additional documentation on employment to a lender can delay the closing.
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 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 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 might turn you down for a loan altogether even if you were previously preapproved.
It 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 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. You might encounter an error 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. The three credit bureaus, Experian, Equifax and TransUnion, provide a free copy of your report. You can obtain it at AnnualCreditReport.com.
- Determine how much you can afford to spend. Knowing how much you can spend on a house helps narrow down the search.
- Get your down payment funding in order. If your parents or another family member plan 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 that it has been in your savings account for at least 90 days.
- Get preapproved for a mortgage. Getting preapproved for a mortgage means you’re ready to make offers on homes. While it’s not a guarantee for financing, it’s generally a good indicator you’ll be approved for a loan when you formally apply.
What to expect before closing on your house
In the days leading up to the closing, your lender will start preparing the closing disclosure. This document will be provided to you 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 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,” 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.”
Summary of what not to do before closing on a mortgage
FAQ about the closing process
Because the home purchase process takes time, mortgage lenders will review a few key criteria once again before officially closing on a loan. This includes rechecking your credit score and double-checking your income and debts. Lenders are primarily looking to ensure nothing has changed since you initially applied for the mortgage.
While you’re waiting to close on a home, you can still use your credit card, but it’s best to only use it for small purchases and pay off the balance in full. Do not make large purchases you cannot afford to pay off that’ll leave you carrying a significant balance from month to month. Amassing debt while you’re waiting to close on a home can impact your DTI ratio, which could impact how much you’re allowed to borrow. You might even get turned down for the mortgage at the last minute.
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.
With reporting by Zach Wichter