Last week we offered up five first-time homebuyer tips on how to spruce up your credit and finances before applying for a mortgage. Here are four more suggestions to get acquainted with before you start house hunting!
Don’t switch jobs.
How much money you make is a significant factor in getting pre-approved for a home loan, but surprisingly, it’s not the most critical part of your home loan application. For a lender to hedge their bet that you’ll be a good candidate to make on-time, monthly payments, a mortgage underwriter carefully reviews the stability of your income and the likelihood that it will remain healthy and consistent.
Changing jobs during the househunting stage or just before closing may create uncertainty about your job stability and require a new review. It’s relatively easy to explain a new position that pays more or is clearly a promotion. But if your income drops or you start working for yourself, talk to your lender. They’re going to find out anyway, so if you’ve changed jobs and kept quiet about it, that’s a big red flag.
It’s better to be upfront with your lender and put a positive spin on the job switch. A letter of recommendation from your new employer can offer reassurance that you’re a valued member of the team and that your new job is secure.
Don’t touch checking, savings or investment accounts.
Experts agree: If you’re applying for a mortgage, don’t make any large or unusual withdrawals and deposits into or out of your bank accounts. Any large deposits — other than your regular income — will need to be explained. Sometimes first-time homebuyers get a hand with down payments and closing costs from family members or close friends. That’s perfectly acceptable, but you’ll want to disclose this to your loan officer upfront. You’ll most likely need to get a letter from the person giving you those funds stating that you aren’t expected to repay the gift. Best practice? Any deposits over a couple of hundred dollars that’s not part of your monthly income should be mentioned upfront.
Similarly, your lender’s underwriter will likely question any large withdrawals, which could also significantly decrease the total bank balances a pre-approval might have been based on. The goal here is to avoid making any financial transactions that could possibly pause the mortgage process.
Don’t change banks.
As you prep to apply for a home loan, you’re going to need to supply many different documents, from pay stubs to proof of employment to lists of assets. One of the most important will be your bank statements. To verify that you have the funds needed for a down payment and closing costs, most mortgage companies will ask for checking and savings statements for at least the last two months. If it takes a few months to find your dream home or get a bid accepted, they may ask for even more recent bank statements.
What are they looking for? A loan underwriter will want to determine where the money in your bank account came from and how long it’s been in your account (hence the tip above that suggests no large withdrawals and deposits). If you change bank accounts at any time during the approval process, you’ll have to start from scratch and delay the approval process altogether. Some lenders look for money to be in an account for at least 60 days and may even require a letter explaining why you changed banks. Our advice? Don’t change banks until after you have the keys to your new place.
Don’t ignore collections & charge-offs.
Do you have collections or charge-offs on your credit report? These figures are used to calculate your debt-to-income ratio (DTI). That’s the percentage a lender uses to gauge how much you can afford to borrow, taking into account the payments you need to make toward collections. Most want borrowers to have a DTI no higher than 43%.
Depending on how much you owe and the type of debt, collections and charge-offs could mess up your home buying plans. Some lenders may not work with potential borrowers who have delinquencies. Others may ask you to prove that the debt has been partially paid or that a repayment plan has been arranged. Just remember: collections and charge-offs signify a potential risk, so even if your DTI is under 43%, any delinquencies may still delay your home loan approval.
But don’t forget this!
If you’re a prospective homebuyer with questions about home financing, please reach out to one of our local loan officers to discuss these tips and other important things: like how to work with a real estate agent, how much down payment you’ll need, or what happens at closing.
Or, if you’re ready to get started now, you can always apply online!