The mortgage process is very specific. It goes without saying there are do’s and don’ts when it comes to successfully closing on a mortgage.
The credit report expires 90 days after it is originally pulled, so if it expires, a new one has to be pulled. If the credit score is now lower, the new score will be used. Which could change the interest rate for the worst. If the score is below the minimum required credit score the loan has to be denied. Unless it can be brought up before closing. Here are the main reasons credit scores might drop in that 90 day period:
- Credit card debt increases
- Late payment on something
- Collection shows up unexpectedly
- New credit account
Do not apply for other credit, such as a car, credit card or any new debt. A popular one I have encountered is buying furniture for 90 days or more same as cash. This can have an adverse impact on the credit score. The reason is due to a high credit utilization ratio on the account. For example, if you purchased furniture for $5,000 and received 90 days same as cash, this may be set up as a revolving line of credit. Let’s say it has a limit of $5,000. With $5,000 available and $5,000 as the balance the credit utilization ratio is 100%. This ratio may severely impact the credit score. In this scenario it could drop a score as much as 30 – 100 points. Depending on the overall credit picture. If the credit is really good it may not drop much. Any drop could make a difference in getting approved and the overall cost of a mortgage (rate, mortgage insurance, closing costs, etc.).
Employment will be verified at the beginning of the mortgage application and again at the end before closing. Do not quit your job, even for a better job, if you have a contract to close on a house. Talk to your lender first so they can get it figured out. Do not do anything to get fired. No eating lunches from the office refrigerator that are not yours. No getting in a fight at work. I still remember the phone call from a borrower. “Patrick, I just got in a fight at work. They fired both of us. Is that going to be a problem for closing on my house this week?” Sadly the borrower did not get the loan because he no longer had a job. Leaving your job is a serious matter when you are applying for a mortgage. When you are trying to buy a house your source of income is imperative. When in doubt ask your loan officer.
Do not make any undocumented large deposits into your bank account. Direct deposit payroll is always acceptable because it can be easily documented. The deposit shows as coming from the employer. All large deposits need to be sourced with a paper trail of documentation. A bill of sale if you sold something, copy of check prior to deposit, or cancelled check after deposit. All money must be documented to make sure it was not borrowed. It has to be your money or from an allowable source such as a gift from a relative. Another issue for documenting funds is the anti-money laundering laws mortgage companies must follow.
Always pay rent with a check so you can document the payment. Especially if you rent from a relative. Paying rent with cash is a bad idea because it provides no record of when rent was paid, or how much was paid. Being able to show 12 months of cancelled checks could be important (or automated payments). If you pay cash and can show ATM withdrawals on your bank statements every month that may work.
Here are some circumstances where a borrower may need to prove rental history when a verification is not possible:
- Landlord refuses to verify
- Landlord dies and nobody can verify rental history
- Landlord is the seller on the house you want to buy, as an interested party this becomes an issue
- Relatives verifying rent is an issue
- Dispute with landlord
If it becomes necessary you need to have the documentation. Always think in terms of being able to document your rent if necessary.
Check back for part 2 of the “do not do” list in a future post. I also put together a video on this topic. Sign up for email notifications below to receive the most recent blog posts and videos.
About the Author: Patrick Ritchie loves teaching about credit; he is the author of The Credit Road Trip and The Credit Road Map series of books. Check out his free online classes at www.CreditLiteracyProject.com.
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