This is a guest post by Blair Warner, senior credit consultant and founder of Upgrade My Credit
You've just found out you've been pre-approved for a home loan!
That's great news! Whether you've found a home you want to buy or you're still out there house shopping, there's something you need to know now that you've secured the financial backing of a lender: it's important to keep your credit in good standing from now until closing day. What does that mean, exactly? Follow our tips below to learn more:
5 Activities to avoid between pre-approval and closing on your home
- Do not make any major purchases (furniture, car, boat, jewelry, etc.)
You've been pre-approved for a mortgage and you've found the perfect home after weeks, or even months of searching, and the dreaming begins. You're getting excited and can’t wait to move in. In the midst of the anticipation, you begin imagining new furniture or appliances that will personalize the house. You're already in that “buying” mode. Besides, you're pleased to have discovered your credit is better than you thought it was. Why not go ahead and buy that 5-piece rattan patio set for your backyard?
Don't do it! Making any major purchase at this time takes money or credit, and your mortgage approval was based on a certain set of criteria by your lender such as debt-to-income ratio, cash reserves, assets, etc. Changing those in any way could jeopardize the closing and funding of your new home, especially if you are depleting reserves and savings that are slated to be used for buying your new home.
- Do not apply for any new credit -
(even if it says you are preapproved or “xxx days same as cash”).
We're bombarded with all kinds of credit opportunities in our society today. Buy this, buy that. Department stores are notorious for trying to get you to apply for their credit card at check out and “save an extra 20% on your purchase today”. Credit card companies send enticing letters stating you are pre-approved for a platinum or gold credit card, making it easy to call an 800 number or apply online. The list goes on: cable companies, new cell phone upgrades or calling plans, vacation deals, big box stores cards, etc.
REMEMBER: Avoid applying for credit of any kind for the same reason mentioned above. Your mortgage pre-approval was based on a certain credit profile and score. You don’t want to do anything that changes it and that could derail your mortgage loan approval and process.
- Do not pay off charges or collections
This may begin to sound like a broken record, but because your mortgage lender pre-approved you with a particular credit profile and credit score that accompanies your loan application file, you don’t want to do anything that could change it. The slightest change in the wrong direction could change your pre-approval to a declined application, or, at best, delay your closing.
The way FICO calculates your score, and the way the credit reporting system works is fairly confusing, and unintentional mistakes or changes you may make in the name of credit improvement are not that easy to correct, and could affect your score negatively. Besides, not all derogatories as they are currently reported are hurting your score or mortgage approval. (Leave it up to your loan officer and/or credit consultant to advise, if necessary). In fact, do not make any changes to your credit profile without talking to your trusted loan officer first.
- Do not change bank accounts
When you applied for a mortgage loan and received your pre-approval, you will remember that you had to provide a lot of different documents, like income documents, proof of employment, list of assets, etc. One set of documents you had to provide was your bank statements.
Most lenders will request your bank statements (checking and savings) for the last two months when you apply for a home mortgage. The main reason is to verify you have the funds needed for a down payment and closing costs. The lender will also want to see that your assets have been sourced and seasoned.
SOURCED means the lender can determine where the money came from. SEASONED means that the assets have been in your account for a certain length of time.
If you change bank accounts, you will have to go through the process all over again, which usually means waiting at least 60 days for seasoning. It may even require a letter of explanation. It’s not worth the trouble. Furthermore, your mortgage underwriter could require a new set of bank statements right before closing.
- Do not make unusual deposits into your bank accounts
There are two actions to consider when it comes to your bank accounts, withdrawals, and deposits. First, you don’t want to make any unusual deposits or withdrawals, especially large ones. Large deposits other than from normal income will more than likely be required to be sourced, and depending on where it came from, could put a wrench in the process.
What about cash gifts, you may ask? It's common for family or friends to want to help first-time homebuyers, especially young couples. Some loan programs allow for down-payment gifts from family members. If a large cash gift is given to you, it's best to disclose it to your loan officer before you deposit it into your account. They will give you directions on how to proceed. To be safe, anything over $200 that is not a part of your normal monthly income should be mentioned to your loan officer.
Secondly, a large withdrawal could cause the underwriter to question what it was for, like one of the examples of large purchases mentioned above. Large withdrawals could also significantly decrease the amount of cash reserves your pre-approval was based on, and throw things off when it comes time to proceed toward closing.
You may be feeling a little overwhelmed with all the do’s and don’ts mentioned above. But don’t let it stress you. In general, all the above could be captioned in a single phrase:
Don’t do anything with your credit profile or finances that will cause a major change, and, if in doubt, ask your trusted advisors like your mortgage loan officer and credit consultant for their guidance.
Wondering if now's a good time to get pre-approved? Contact Amerifirst Home Mortgage by clicking the button below. They're happy to answer any questions you have about the home buying process.
Author bio: Blair Warner is the founder and Sr. Credit Consultant of Upgrade My Credit. After years in the mortgage business, he has become one of the foremost credit experts and debt counselors in the Dallas/Fort Worth area since 2006. He is passionate about helping people manage their credit and debt rather than letting it manage them. As a father of four and with a love for teaching, Blair not only advises, but guides and educates consumers on how to lead a more fulfilling financial life.