We used to think that HARP-eligible borrowers were “underwater” meaning they owed more than their home was worth, but wasn’t always true. In fact, since the inception date of HARP (April 2009), 56% of all those who had completed a HARP refinance had Loan-to-Value (LTV) ratios of 80% to 105%…
When you decide you’re ready to buy a home, you’ll (hopefully) examine your own finances closer than you ever have before – because your mortgage underwriter will be looking at your finances even more closely. It’s the underwriter’s job to evaluate your income, credit score and assets to make sure you’re a solid loan candidate. Because of this, it’s important that nothing you do makes your mortgage company question your ability to pay them back. To show them you’re nothing short of their dream loan candidate, here’s a list of things you should avoid doing during the mortgage process.
Making Big Purchases or Lifestyle Changes
To qualify for a mortgage, your mortgage company needs to be absolutely sure that you’ll pay them back. One way to show them how reliable you are is by watching your spending habits. Hold off on making any sizable purchases or financial decisions until you’ve closed and you can, for sure, afford them. Even if you’ve budgeted extensively and can afford a new car, this new expense might make your underwriter question whether you can afford all of your monthly payments.
You’ll also want to avoid any major lifestyle changes, if possible. Whether it’s adopting a child or finally deciding to quit your job and join the circus, you don’t want your underwriter to think you’re anything but responsible when it comes to money; big changes like babies can put a strain on your bank account.
Even big deposits can be questioned by your underwriter. Your underwriter wants to see a steady, regular flow of income. If you’re only staying afloat because of random, large deposits from family members, you’re not a reliable candidate. If you receive a big enough deposit, you’ll need to fill out a gift letter (conveniently explained below).
Forgetting Important Paperwork
Most lenders will ask for 20% of your home’s value upfront, in addition to other application and processing fees, which can be really expensive – especially for first-time home buyers. If your family knows you’re house hunting, they might want to help you out with the down payment. If Grandma sends you a $20 bill in the mail, you shouldn’t worry. However, if you’re accepting any sort of significant cash gifts to help with your down payment (anything exceeding 50% of your monthly income), you’ll have to do a few things to make sure your lender understands it’s a gift – not a personal loan.
First, your generous donor will have to write a gift letter to your lender. This should include personal information about the donor, their relationship to you, the property’s address, the total amount of money gifted, the date of the transaction and a statement saying the donor is expecting nothing in return. Once the donor signs this letter, you’ll be in the clear. If you forget to get a gift letter, your mortgage company will assume you have to pay the money back, and this could keep you from qualifying for your loan.
Changing Your Credit – At All
When it comes to your credit, you shouldn’t make any drastic changes. That means turning your cashier down when they tell you how much you’ll save by opening a charge with them. This also means you shouldn’t close any cards out, either. Both actions can hurt your credit score, and you want your credit score to be as high as possible when you apply for a home loan.
By opening a new line of credit, you’ll create an inquiry on your credit report, which can lower your credit score. Any new payments that come with your new, shiny credit card can negatively affect your debt-to-income ratio, which is something your underwriter looks at closely. The higher your debt-to-income ratio, the bigger risk you’ll pose to your lender.
Instead of closing out credit accounts, just pay them off monthly like you typically would. This way you keep your open credit and your credit score stays high. Closing credit accounts can be dangerous if you have debt because your debt takes up a higher percentage of your available credit, which can drastically hurt your credit score. When applying for a home loan, focus on keeping your credit consistent and not making any big changes until six months before and after the underwriting process.
While some things in life can’t be changed, like illness, job loss and natural disasters, others, like your personal finance habits and lifestyle, can be monitored, and can hurt your chances for mortgage approval if not handled correctly. If you anticipate any big, unavoidable changes during the underwriting process, always make sure to talk them over with your Home Loan Expert.