Think you're in the clear because you've made an offer on a house and your mortgage process has begun? Think again!
There are things you could do while waiting to close on a home that could jeopardize your mortgage approval. As there is a substantial amount of money involved, lenders are not willing to take big risks. That's why your lender will carefully monitor your financial situation right up until the day you close.
Finding the right home for you, making an offer, and choosing a lender can be an endeavor, especially since there is a lot of competition for homes with in-demand features. It would be disappointing to go through all of this, only to find that a week before closing, you did something that you had no idea would put your mortgage approval at risk.
If you're getting ready to close on a house, don't do the following!
1. Close Credit Cards
From a personal financial standpoint, closing paid-off or unused credit cards may seem like a wise move. You don't need it anymore, so why keep the temptation of having it? It could cause you to make an impulsive purchase. That's true for many people. But credit cards are tricky things. Your credit "utilization," as they call it, constitutes nearly one-third of your credit score, making it very influential.
Having a low or zero balance on a credit card helps lower your utilization rate. But, if you leave a card with a zero balance for too long and the issuer closes it due to inactivity, that could potentially reduce your average age of accounts and, thus, could cause a drop in your credit score. Closing accounts also makes it seem like your line of credit has been suddenly reduced—that, in turn, can cause your utilization rate to increase.
Too many credit cards can make you look risky to lenders. Too few credit cards can make you look risky to lenders. Complicated, right? So, how many credit cards should a person have? It's generally recommended to have between one to three credit cards, assuming you're able to stay on top of all payments.
If you determined to close a credit card, make sure you are closing the right credit card. Generally, you get rewarded for maintaining long-standing credit accounts and for only using a small portion of your credit limit.
When choosing which cards to close, look at which have been open the shortest amount of time, but also factor in which have the highest fees. You can close more than one credit card; just space those closures out over time. Be sure that you understand how closing one account will affect your credit utilization rate.
Remember: An increase in credit card limits and a reduction in credit card balances means your credit utilization will decrease, and thus, your credit score will increase.
Because you don't want to suddenly change anything that has the potential to affect your credit score, it's best to wait to evaluate your credit cards until after you've signed all paperwork and are moving into your new home.
2. Get a Head Start on Home Improvement Projects
Stumble across a big sale on a washer and dryer that would look great in the home you hope to be closing on soon? Resist the temptation to buy it! A large purchase that you finance can wreak havoc on the entire mortgage process and could even cause you to be denied.
It's a different story if you plan to make an all-cash purchase. That is less likely to disrupt the closing process. Of course, it all depends on what your definition of "large" is. Is $500 a big buy for you? $5,000? How much is too much? It's all up to your lender and your overall financial health.
The takeaway here is that if a purchase (whether financed or paid in cash) will make a noticeable difference in your financial health, it's not a great move to make right before closing on a home.
Your best bet is to fight the temptation to purchase items for your home until after you've moved in, and have a better feel for what your monthly expenses will be. The first few months may be financially tight, especially since you had closing costs.
3. Change Your Employment Status
If you can help it, don't change your employment status right before closing on a home. Carefully evaluate any new offers that you get to ensure that it is a smart move financially.
Why? Any change in your employment could spark the need to start the approval process all over again, even if you are being paid more. A new job brings up questions for the lender. Is there job security? Will the job being able to produce a reliable stream of income over time? How long is the probationary period? If you suddenly lose this new job, do you have the means to make your mortgage installments every month?
If the job is one that you just can't pass up, keep in mind that at the very least, you'll need to produce documentation relating to that job, which may push your closing date back.
If you are planning on changing your employment status, be sure to communicate that with your lender as soon as you've made that decision.
4. Consolidate Debt
Consolidating debt can feel like a smart move and generally it is, assuming you consolidate your debt at the right time.
When it comes to securing the best mortgage rates and terms, good credit is key. Paying down debt helps raise your credit score, and debt consolidation can make it much easier to keep track of payments if your debts are spread out.
So, should you consolidate credit card debt before getting a mortgage? Yes, but only if it's well before. Many people make the mistake of waiting too long to consolidate and tackle it during their mortgage approval process.
Here are a few reasons why you shouldn't consolidate debt during the mortgage process:
- A consolidation loan means a hard inquiry on your credit report, which will drop your score. If your score is on the line between two ratings, this inquiry could push your score into a lower bracket, which means less favorable interest rates.
- If you consolidate onto a new credit card, your credit utilization rate will likely go up. Now that you know how important your utilization rate is, this is a big mortgage no-no.
- You may actually increase the amount you owe, at least in the beginning. That's thanks to fees that are associated with certain types of debt consolidation options, like origination fees to open an account or fees on balance transfers.
Unless you have ample time to bounce back from any negatives that come with consolidating your debt—like a drop in your credit score—it's almost always better to wait until after you have completed the mortgage process. Remember, you can always refinance at a later date once you've paid down some of those debts and have raised your credit score.
5. Anything That Will Affect Your Credit
Opening new credit cards, paying bills late, agreeing to be someone's loan cosigner, changing bank accounts—all things that can affect your credit score. When you're in the process of getting approved for a mortgage, these are all mistakes that could lead to you missing out on your dream home.
A great piece of advice to follow: Once you've applied for a mortgage, don't change a thing.
Don't do anything that will change your financial status. All of those moves should have been completed before you started to shop around for a lender. Thinking you can do something that will suddenly get you even better terms is a risky move that, more often than not, leads to being outright denied.
You have likely taken months, even years, to prepare for a mortgage. Don't throw all of that hard work away by making an impulsive decision. You can always reevaluate your financial situation down the road, and thanks to refinancing, you can simply replace your mortgage with another that offers more favorable terms.
Slow and Steady Wins the Race
Once you've officially applied for a mortgage, keep doing what you have been doing. Lenders want to know that you make financially sound decisions and that you're a trustworthy borrower, so don't do anything that could make your lender question your ability to manage money.
If you have yet to find a lender, compare options with help from Lendgo to ensure that you have access to all of the competitive rates that you qualify for. If you've already found your lender, be sure to pay attention to the market so that when the time comes to refinance, you can lock in a low interest rate.