Yet, you can damage your chances of getting a loan, or the loan product you want, by ramping-up your spending or changing your credit activity. In general, banks look at buyers and want to be able to predict their future ability to pay a home loan based upon their current and previous financial activity. When you start to change your behaviors, whether by purchasing a new car or closing/opening new credit lines, it looks like you might be developing new financial habits. This makes you look less predictable on paper even if there are legitimate reasons for the activity.
1. Do not apply for any new credit lines, loans or open new bank accounts.
When you apply for credit (e.g., auto loan, mortgage, credit card/line) or a bank account, the financial institution is going to pull your credit score and history–otherwise known as an “inquiry.” While an inquiry or two isn’t a big deal, multiple inquiries can be a signal to financial institutions that you are looking for credit–which might mean you are changing your spending behaviors and/or are low on cash. Neither one of these scenarios help you and too many “inquiries” can ultimately lower your credit score.
2. Do not close existing credit lines or cards
This advice seems counter-intuitive–but it’s true. The reason is that when you close an account, you limit the amount of credit available to you. When generating your credit score, one thing that the credit model considers is how leveraged you are–which is how much of your available credit you are currently using. For example, if you had $20,000 available from various credit cards, and currently had a balance of $5k you would be leveraging 25% of your available credit. Yet, if you closed one credit card with an available balance of $15k (and still had $5k balance) you are now leveraged 100% of your available credit. The credit models generally don’t look favorably on you being highly leveraged and may adjust your score downward as a result.
3. Please Don’t use Cash Advances for your Down Payment
I know it might be tempting, but please don’t use that credit card courtesy check to cover your down payment. If you are trying to figure out how to make your down payment, or cover your closing costs, please call me to discuss. Taking out new loans or increasing your credit card debt to cover these items may jeopardize your ability to close on your new home. One final note: if you are receiving a financial gift to help with your down payment, please remember gifts may only be received from family members.
4. Please Keep your Day Job
Your job, and its income, play heavily into your ability to get a loan. Lenders do not like to see job changes that could impact your ability to stay employed–and make your loan payments. This includes things like changing career paths (e.g., going from Engineering to Landscaping) or even changing employers. Financial institutions want to see a track record of steady employment and pay to help limit their risk. So, if you’ve been thinking about going back to school or making a career move, let’s talk first–or at least wait until after you close.
5. Call your Mortgage Guy–before you buy anything!
Even if your “business” is paying for it, please call me if you’re thinking about buying anything of a material nature. This includes that new car, washer/dryer or TV. Immediately prior to closing, lenders will often re-pull your credit and re-verify your employment/income to ensure nothing has changed. It’s better to be safe than sorry!