The decision to buy a new home is exciting. The dream of building your own paradise from the ground up comes with endless possibilities. You can create a custom landscape, paint the walls your favorite color, turn the basement into a studio – anything you want. For many, it’s a dream come true. But first, you need to get your loan approved.
Your credit is the golden ticket to getting a home loan, and it’s what loan officers consider first during the pre-approval process. Getting pre-approved for a loan is important because many sellers won’t take you seriously unless they know you can afford the payments.
To get approved, you need a good credit history as well as a good score. Many lenders require a minimum credit score of 680, regardless of your current income. A higher credit score will secure you lower interest rates.
After considering your credit history, a lender’s next concern is how you’ll get the funds to pay your down payment and closing costs. Once they’ve established that, they’ll determine how you’re going to pay your mortgage, and that’s where things can get tricky.
While a lender is looking into your financial history, some innocent actions can stick out as red flags and get you denied. Here’s a list of what you should never do before applying for a home loan:
- Don’t move money between accounts
Moving money around from your checking account, savings account, stocks, mutual funds, money market account, retirement account, and 401k will make it harder for your home loan to be approved. The mortgage underwriter will see the withdrawals and deposits, and may ask you to provide extensive paperwork so they can trace every dollar. During this process, you could be asked to provide information you didn’t save – like receipts for deposits and canceled checks.
To a lender, large deposits over $1,000 might mean you’ve taken on more debt and borrowed money. Even a gift from a parent is enough to raise suspicion and must be verified.
It’s not the lender’s fault. They’re just trying to prevent fraud and do their job.
Sometimes you can’t avoid moving money. For example, if you get paid through direct deposit and need the money in the other account for recurring expenses. In this situation, it should be easy to show the lender your transfers through your monthly statements.
From this moment on, avoid moving money unless absolutely necessary.
- Don’t change banks
Changing banks is a red flag to lenders. They have no way of knowing whether you changed banks to escape debt, or if there was a legitimate reason. If you’re planning on buying a home, stick with your current bank until you connect with a loan officer.
- Don’t change jobs
Don’t change jobs before or during your loan application process. If you change jobs in the middle of the process, the loan officer will need to process a new application based on your new job (or lack thereof), which can get you denied.
If you’re an hourly or salaried employee who doesn’t earn overtime, commission, or bonuses, changing jobs shouldn’t be a barrier to getting approved for a loan. For example, if you’re a salaried manager at a retail store and move to work for a competitor, as long as you’re in the same line of work and a similar position, you should be fine. However, there are certain circumstances where changing jobs can get your loan denied.
If you’re a commissioned employee, stay put
If you’re a commissioned employee, a lender will consider the average of your commissions for the last couple of years. If you switch jobs to another commissioned position, the lender has no way to see your potential for income. A new job means you’re selling new products or services, you have new routines, a new commission percentage, and you need to start from the ground up. Your past earnings may not be an accurate reflection of what you’ll earn with the new company.
If you’re an hourly employee earning overtime, don’t switch
If you work full-time as an hourly employee and rely on overtime for a good portion of your salary, it’s wise to postpone changing jobs until you are approved for your home loan. Lenders know there’s no guarantee you’ll be working the same amount of overtime at a new job. Even if your new job doubles your salary and you don’t need overtime, you’ll lack the established history of earning that income so it’s best to wait.
Don’t quit your job to become self-employed
Self-employment is one of the greatest freedoms in the world, but it’s also the most challenging when it comes to proving income. Mortgage lenders want to see two years worth of tax returns for self-employed individuals.
- Don’t buy a new car
Nothing beats trading in your old car for new leather, but if you’re planning on buying a home, you should definitely wait to buy a car. You may have the money for a large down payment on your home, and few living expenses, but if your income to debt ratio doesn’t match what the lenders want, you’ll get denied. Having a car payment (or not) could be the deciding factor.
- Don’t make major purchases that create debt
Keep your credit cards out of sight and out of mind until you get approved for your loan. Remember that your income to debt ratio and your credit score are what lenders consider to approve your loan. The more debt you take on, the less likely you’ll be approved.
Anything with a recurring payment can be considered debt, like appliances, electronics, and financed vacations.
Ready to buy? Green Residential can help
Whether you’re buying your first home, or adding to your portfolio, we can help you find what you need. We have decades of experience in the real estate industry, helping residents in the Houston area with all of their buying and selling needs. Try our convenient home search tool to view available properties in the Houston area, or contact us today to see how we can help you!