Many home buyers and people refinancing sometimes get complacent once they get a mortgage approval. They assume the approval is set in stone. But that’s not the case. There are at least five things you should not do before you close on your mortgage.
The mortgage process is dynamic. Even after you get your approval, things are happening. Phone calls are being made, emails are exchanged, and documents are supplied to get to the next step in the closing process. With each event, the potential for a change in your mortgage status becomes possible.
As a general strategy, try to keep everything as quiet and calm as possible between the mortgage approval and mortgage closing. In particular, here are five things not to do before you close on your mortgage.
1. Don’t Take On a New Loan or Credit Card
Here’s a little secret your mortgage lender may or may not tell you upfront: they may pull another credit report only days before closing.
Yes, lenders always run your credit at the time of application. That’s how they decide to approve or deny your mortgage. But that’s not necessarily the only credit report that’s pulled during the process.
Lenders can and likely will pull a second credit report (soft pull) just before closing, to make sure you haven’t taken on any new loans. This is a quality control function, designed specifically to limit the possibility of borrower default resulting from undisclosed credit.
Let’s say a borrower is approved for a mortgage and purchases an SUV or a shiny new truck only days later. The $600 per month payment on that vehicle changes their entire mortgage scenario. The new loan payment might mean the borrower no longer qualifies for the mortgage applied for. It could also drop the borrower’s credit score, resulting in a higher mortgage rate.
If you apply for a mortgage don’t be applying for any other financing or credit. The new applied for credit, whatever the purpose, may hurt your mortgage application.
2. Don’t Quit Your Job
This can be an even bigger deal-breaker than taking on new credit. It may not be as much of a problem if you’re leaving one job to take a better-paying one “in the same field”. But if you’re quitting your current job to take a lesser-paying position, that can be a problem. The lender may see it as a lack of employment stability, calling your income into question.
If you plan to make any such radical career changes, consider waiting until after you have closed on your mortgage. And don’t take that lightly either – make sure you’ll have sufficient income to make your house payment with or without your current job.
3. Don’t Move Money Around
If there’s one thing that makes mortgage lenders nervous – and suspicious – it’s the movement of major amounts of money. Make sure you’ve got that all taken care of before you even bother applying for a mortgage.
Lenders are wary of money movements primarily because they are always on the lookout for undisclosed debts. The arrival of a large amount of money into a checking or savings account can be an indication of new credit or a new loan. That will bring all the problems we discussed in #1 above.
At a minimum, the lender will require you to explain and document the large deposit. While that may be doable, most borrowers consider it to be inconvenient at the very least.
Also, you should never mess around with the money that’s earmarked for a mortgage closing. Lenders carefully track the flow of that money from application to closing. If there are any significant movements of money that have not been disclosed to the lender, you’ll face a new round of questioning and the requirement of credible documentation.
4. Don’t Run Up Your Credit Cards
Some people try to get around the new mortgage restriction by running up their credit cards.
The same issues arise here as they do with taking out new credit. The lender will pull a new credit report just before closing, and higher credit card balances will appear. If this happens, the lender will need to recalculate your income to confirm it is still sufficient to carry the new mortgage payment, the debts you disclosed at application, and the fresh credit card debt. The lender may be forced to revoke your approval if the recalculation results in a debt-to-income ratio above acceptable thresholds.
There’s a secondary problem with running up credit cards. That’s the impact it has on your credit score. Credit utilization is a major component of your credit score. In fact, it’s second only to payment history in the calculation of your score. If that ratio rises substantially – due to a large run-up in credit card balances – your credit score can fall a lot. That can result in either a higher interest rate or even a withdrawal of the mortgage approval.
No matter how much you think you need something, try to leave your credit cards out of the picture – at least between application and mortgage closing.
5. Don’t Cosign a Loan For Anyone
By now you’ve probably figured out exactly where this is going. But first, let me explain how mortgage lenders see cosigned loans.
On a personal level, most people see a cosigned loan as someone else’s obligation. You’re just cosigning the loan as a favour to help them get their new loan. You don’t see it as your liability. Your mortgage lender will not see it that way.
To a mortgage lender, a cosigned loan is your loan. And legally, that’s how it will be interpreted in court. Should the primary borrower default on the loan, you as the cosigner would be responsible for either begin making the payments or paying off the loan. That’s the whole reason why lenders want cosigners on loans in the first place.
Mortgage lenders are aware of this legal requirement. They’ll sometimes exclude a cosigned loan from your obligations if you can provide evidence that the primary borrower has exclusively made the payments for at least the past 12 months. But if you cosign a loan after getting your mortgage approval, there’ll be no evidence the primary borrower has made the payments.
The lender will consider the cosigned loan to be fully your responsibility. The loan payments will be charged against you for debt calculation purposes. If you no longer qualify for the loan as a result, your mortgage approval can be withdrawn.
Bonus Tip – “Don’t” – Don’t Be Late on ANY Payments!
Don’t assume it will be okay to be late on a debt payment or two (or three) just because you have a mortgage approval. Recent late payments, in particular, can crush a credit score. If your score falls 50 or 100 points between approval and closing, your whole mortgage situation can change dramatically.
Final Thoughts on What Not to do Before You Close on Your Mortgage
Once you get a mortgage approval, you have three basic responsibilities:
- Comply with and satisfy any terms or conditions of the mortgage approval,
- Don’t make any significant financial moves, and
- Keep your credit clean.
That means your financial life between approval and mortgage closing needs to be as calm as possible. Don’t make any major purchases, don’t make any major money moves, don’t take on any new loans, don’t run up your credit card balances, and don’t miss any credit/loan payments.
Your top priority after getting your mortgage approval is to get yourself to closing day. Keeping things quiet on the financial front is the single best thing you can do to make sure that happens. Following these simple rules will go a long way towards a stress-free mortgage application and home buying process.