Applying for a mortgage is a significant financial step that often marks the realization of homeownership dreams. Whether you’re a first-time homebuyer or looking to refinance, securing a mortgage is pivotal. However, the path to mortgage approval is lined with potential pitfalls, and navigating it successfully requires careful planning and smart decision-making.
This article will explore the top things to avoid before applying for a mortgage. Understanding and avoiding these common missteps can mean the difference between a smooth mortgage application process and potential roadblocks that can hinder your homeownership aspirations.
1. Avoid Making Large Purchases with Credit
Whether it’s a brand-new car, expensive home furnishings, or other major expenditures, using credit cards or loans to fund these acquisitions can significantly impact your mortgage eligibility. Lenders scrutinize your financial activity in the months leading up to your mortgage application, and large credit purchases can increase your debt-to-income ratio, making you appear riskier to lenders.
Credit utilization is one of the largest factors of a FICO credit score. Most lenders prefer to see applicants utilizing 30% or less of their available credit while maintaining a good debt-to-income (DTI) ratio.
2. Avoid Spending Your Savings
One often overlooked pitfall to avoid when preparing for a mortgage application is dipping into your savings or depleting your financial reserves. While homeownership is a substantial financial goal, it’s essential to maintain a safety net of savings for unexpected expenses, such as home repairs or medical emergencies. Raiding your savings to cover everyday expenses or luxuries can signal to lenders that you may not have the financial stability required for homeownership.
By safeguarding your savings, you’ll strengthen your mortgage application and secure your financial well-being in the long run.
3. Avoid Applying for More Credit
While building your path toward mortgage approval, it’s vital to refrain from seeking new lines of credit. Every credit inquiry on your record, such as credit card applications or loan requests, can impact your credit score and, consequently, your mortgage eligibility.
When applying for a mortgage, Lenders meticulously evaluate your credit history and assess your ability to manage debt responsibly. Applying for additional credit can create uncertainty regarding your financial stability in the eyes of mortgage lenders.
4. Avoid Closing Credit Accounts
While it might seem logical to close old or unused credit cards, especially to declutter your financial portfolio, doing so can have unintended consequences on your mortgage application. Lenders not only consider your credit score but also your credit history and the length of time your accounts have been open. Closing credit accounts can shorten your credit history and reduce your available credit, which may affect your credit score.
5. Avoid Poor Credit Management Practices such as Late Payments
One factor that holds immense weight is your credit history. It’s not just about having a good credit score; it’s also about demonstrating responsible credit management. Late payments on credit cards, loans, or other debts can harm your mortgage application. Mortgage lenders closely examine your credit report, and any history of late payments may raise concerns about your financial responsibility.
6. Avoid Initiating Major Life Changes such as Changing Jobs
When it comes to securing a mortgage, stability is a keyword that lenders value greatly. One significant change that can raise concerns in the eyes of mortgage underwriters is a shift in employment status.
While changing jobs is common, doing so in the months leading up to your mortgage application can introduce uncertainty into your financial profile. Lenders often prefer applicants with consistent employment histories as it signifies a reliable source of income for repaying the mortgage.
7. Avoid Cosigning on a Loan
Co-signing for another individual’s loan may seem noble, but it can have unintended consequences on your financial standing when applying for a mortgage.
When you co-sign a loan, you essentially share responsibility for its repayment. This means that the debt and its impact on your creditworthiness becomes intertwined with your financial profile. Lenders evaluating your mortgage application consider this co-signed loan, potentially raising concerns about your ability to manage additional financial responsibilities.
In the journey toward homeownership, a successful mortgage application is the gateway to realizing your dreams. Before applying for a mortgage, we’ve explored the top things to avoid, shedding light on the financial decisions that can make or break your path to that cherished front door with your name on it. From the pivotal role of a strong credit score to the dangers of significant credit purchases, changes in employment, and the risks of co-signing for others, understanding these pitfalls is crucial.
It’s not just about avoiding these missteps; it’s about making informed and responsible financial decisions that will set you on the right course. The road to securing a mortgage is a marathon, not a sprint. By nurturing your financial health, demonstrating sound judgment, and seeking professional guidance when necessary, you’ll ensure that your dream of homeownership becomes a reality.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients to lower their monthly mortgage payments.
Updated on October 11, 2023