By Jason Robie
When I bought my first property back in the 20th century, I did so with almost no money down. A former co-worker was the rep. and walked me through the whole process that made it far more pleasant and educational. One thing I distinctly remember was the specific set of "rules" he set up to help maintain my standing with the financial institutions.
After the pre-approval, there’s a bit of a tightrope that buyers should be aware they are walking as they move closer to getting that loan. Let’s review a few of those missteps, and perhaps we can help you avoid these traps on the way to your next new home.
To be clear, a pre-approval letter is not much more than a statement from that bank noting that "at the present time" your finances are in good enough shape and "you are worth the risk" for them to lend you a certain amount of money. They will then move forward and do their due diligence with all of your financial records as well as the evaluation of the value of the home. There are many more steps taken after that letter is printed, so it is wise of you to watch your step during this period.
While this may seem painfully obvious to most, you should not add to your current debt load during this time. Beyond the obvious, ill-advised move of buying big-ticket items or going on any sort of shopping spree, it is also frowned upon to sign up for new credit cards. Putting yourself in the shoes of your lender, anything that would pique their interest or give them cause-for-pause is going to hinder the process. They are looking for low-risk customers who have stable finances and are not bouncing all over the place with their budgets and debt load. Keep yourself on the straight and narrow for these few weeks and there will be much less chance of red flags flying over your account folder. (Not actually sure if there is such a thing as an “account folder," but you get the idea!)
Although equally obvious on the surface, this one has its own nuances. Don’t quit your job! It is actually (mostly) fine for you to “change” jobs, ideally with an increase in pay, so long as you get a W-2 at the end of the year. Making the switch from a salaried position to one that pays by commission is a big red flag. This is not because commission-based jobs don’t have the potential to pay as well; it’s just that tricky, little word “potential." Banks want to see a track record of your income. If you jump from a consistent paycheck to one with no proven record of payments, most banks will wisely run away screaming.
The same is true for starting your own business. I’ve owned my company for over five years now, but when I first started I had just closed on and moved into my new house. Had I ventured to the bank before starting this venture (and then quit my job before we closed on the house) I have a feeling the bank would have backed out of the deal faster than I could say “yeah, but..." It is no secret that business owners can get loans and mortgages. I would just continue the planning process before you decide to jump ship and conquer the world on your own. Once you have made a mortgage payment or two, go get ‘em!
This one is a bit counter-intuitive, but hear me out. It is not advisable to pay off (or down) old debt during this time period. While you may think that you’re doing the right thing and (even better) working yourself toward a better mortgage rate by paying down your debt, you are actually hurting your credit score. Paying off (and then canceling) a credit card can temporarily drop your credit score a bunch. It can actually take 60 to 90 days for your credit score to bounce back after canceling a card.
Yes, it is a great idea to pay off those old debts and cancel those old cards (although there’s still some debate about that second part), but do so well before you first approach a bank or wait until after you have walked away from the closing table. Remember that the name of the game here is consistency and stability in the bank’s eyes. If you have the pre-approval letter in your hands, that means you’ve made it past the first round. Now simply stay the course until closing.
Lastly, try to avoid moving around large sums of money. In my case, this one isn’t hard to avoid since I’m not familiar with the phrase “large sums of money” when it comes to my finances! If someone wants to help you out with your home purchase, be sure they take care of this before you first approach the bank. “Gifts are not uncommon with home purchases, but the bank will often require two months of bank statements from the giver if the gift is made while the buyer is being reviewed,” said Badger Realty agent Roland Turgeon. He continued, “We recommend these gifts be made months in advance of the initial visit to the bank or after the buyers have left the closing table. This helps avoid further scrutiny by the bank and the inevitable delay of those buyers spending their first night in their new home."
Getting a mortgage is a stressful time and one in which the lending institution really holds the keys to your housing future. You can ease this process by getting your finances in order before you ever approach them and maintaining consistent financial behavior while the evaluation period is going on. If your finances are in good enough shape to get a pre-approval, chances are good that you are on your way to homeownership. Congratulations!