Applying for a mortgage is an exciting step toward buying a home. It is natural to start thinking about moving in, arranging furniture, and making the place your own.
Before you close, though, keep your attention on your finances, too. Purchases, credit decisions, and changes to your accounts can affect whether you still qualify for your home loan.
The practical rule is simple: Talk with your loan officer before making financial changes. That includes decisions that may seem helpful, such as closing a credit account, as well as bigger moves like buying a car.
1. Do Not Deposit Cash Without Discussing Documentation
Lenders need to know where your money comes from. Cash is not easily traceable, which makes documenting its source important.
Before you deposit any amount of cash into your accounts, ask your loan officer how to document the transaction properly. Do not assume that putting the money in your bank account is all the documentation your lender needs.
The point is not simply to avoid a large deposit. It is to discuss the source of the money and the documentation before you act.
What to ask: “I have cash I want to deposit. What do you need from me to document where it came from?”
2. Hold Off on Large Purchases
Furniture and appliances can be tempting when you are preparing for a move. But home-related shopping is not the only spending to watch. Any large purchase can raise a red flag for a lender and could affect your qualification.
When a purchase adds debt, it increases your debt-to-income ratio. That ratio compares your debt obligations with your monthly income.
Higher debt-to-income ratios make loans riskier for lenders. If your ratio rises, you may no longer qualify for the mortgage you applied for.
Resist the urge to make a major purchase before closing, even if it is something you want for the new house. Talk through the purchase with your loan officer instead of deciding on your own that it will not matter.
What to ask: “I am considering a large purchase. How would it affect my debt-to-income ratio and mortgage qualification?”
3. Do Not Cosign a Loan for Someone Else
Cosigning may feel like helping a friend or family member rather than borrowing money yourself. But when you cosign, you take responsibility for that loan and its repayment.
That obligation also affects your debt-to-income ratio. Even if you say the other person will make every payment, your lender has to count the payments against you.
The important distinction is between who plans to pay and who is responsible for repayment. Your promise that you will not make the payments does not remove your obligation as a cosigner.
Before agreeing to cosign, discuss it with your loan officer. Do not treat someone else's loan as separate from your own mortgage application when your name will be on it.
4. Do Not Switch Bank Accounts or Move Money Without Checking
Lenders need to source and track your assets. Keeping your accounts consistent makes that task easier.
Before switching bank accounts or transferring money, speak with your loan officer. Explain what you want to move, where it is now, and where you intend to put it.
This is another situation where discussing the plan first is more useful than explaining the transaction afterward. Your loan officer can review the move with the lender's need to track your assets in mind.
What to ask: “I want to transfer money between accounts. What should we discuss before I move it?”
5. Do Not Apply for New Credit
While your mortgage is in process, avoid applying for a new credit card, an auto loan, or other new credit without talking with your loan officer.
Having your credit report run by organizations across different financial channels, such as mortgage, credit card, and auto lenders, affects your FICO® score.
A lower credit score can affect your interest rate and may also affect whether you are eligible for approval. That makes a new credit application more than a separate shopping decision.
Whether you are considering a credit card or financing a car, bring the idea to your loan officer before submitting an application.
6. Do Not Close Credit Accounts to Look More Qualified
It may seem logical that less available credit would make you look less risky to a lender. Many buyers assume closing accounts will improve their chances of approval. That assumption is not correct.
Your credit score reflects more than your payment history. Important components include the length and depth of your credit history and how much credit you use as a percentage of your available credit.
Closing accounts negatively affects those aspects of your score. It is not a step to take on your own as a way to strengthen your mortgage application.
Before closing an account, ask your loan officer to discuss how that decision may affect your credit and your home loan.
Keep Your Lender Informed About Changes
Not every financial change is something you planned. Be upfront about changes that have happened and changes you expect to happen.
Your lender should review changes involving your income, assets, or credit so you can discuss how they may affect continued qualification. If your job or employment status has recently changed, share that information as well.
The goal is to review your situation and intentions before you make a decision whenever possible. That conversation is not a guarantee of approval. It is an opportunity to understand how a change may affect your loan.
Your Before-Closing Checklist
Before taking action, check with your loan officer if you plan to:
- Deposit cash or move money between accounts.
- Make a large purchase, including furniture or appliances.
- Cosign a loan for someone else.
- Switch bank accounts.
- Apply for new credit or close an existing credit account.
- Make a change involving your income, assets, or employment.
You want your home purchase to go as smoothly as possible. Start by making a list of any financial changes you are considering before closing. Reach out to Ed Parcaut to discuss that list and how those decisions may affect your home loan before you act.
