Getting a Home Mortgage: The Ten Commandments

Buying a new home is exciting! Most people will only build and finance a new home just a few times in their life. When you need a mortgage to get your new home there are a few rules that you need to know about. While some may seem like common sense, they still get broken by many home buyers. When they get broken, they can add weeks to the mortgage approval process or even worse, sink your hopes of getting a home for a year or even more. Here are 10 “Thou Shalt NOTs” you need to know about.

The Ten Commandments

1. Thou shalt NOT change jobs, become self-employed, or quit your job.

Lenders like stability. If there is going to be a pending job change, plan it for after you build your home and your mortgage has closed. If you know you are going to change jobs then discuss this with your loan officer. It typically has to be in the same profession and with a documentable salary that meets the lenders requirements to approve your loan. Self-employment income is hard to document and income for the self-employed can fluctuate greatly. Start that new business after your loan closes!

2. Thou shalt NOT buy a car, truck, or van (or you may find yourself living in it!).

Buying a new home is exciting. You are getting a new home in a new location. Your new home comes with a new two car garage. It’s a holiday and the local car dealer is having a sale on the truck or car you have always wanted… and it would look great in your new garage. I want you to have your new truck or car. I just want you to have it the day after your final closing on your home. Vehicle payments are expensive. The lender may pull your credit up to the day of final loan closing. That new payment can spell disaster for your ratios and that new car may cost you your new home!

3. Thou shalt NOT use charge cards excessively or let your accounts fall behind.

These two common sense items are broken more often than you think. Building a new home is both exciting and stressful at the same time. This excitement means that you want new things in your new home to make it perfect. When you put a significant amount of these new things on your credit card you are changing your debt ratio. If it gets too high, then you can disqualify yourself from your new home loan. If in all of the excitement and stress you forget to make a payment, you just sank your credit score. A person that has a 780 credit score can lose as much as 90 – 110 points with one 30 day delinquency!

4. Thou shalt NOT buy furniture with money set aside for closing.

With changes in the home mortgage industry lenders require higher down payments. For construction loans there can be additional fees that need to get paid. All of this is disclosed to you early on in the process. This money has to be in the bank and verifiable by the lender. If you get to closing day and it is gone, then no loan. Because this money has to come from you (your skin in the game), a last minute loan or gift from dad or grandma isn’t an acceptable way to replace it.

5. Thou shalt NOT omit debts or liabilities from your loan application.

Full disclosure is the expectation when applying for a mortgage. The lender has to meet lending guidelines and your debt ratio is a key one. If you omit these from you application thinking the lender won’t find them, you would be wrong. And when they do, they search to see if there are any others missing. Finding these undisclosed debts can increase your ratio and sink your loan approval prospects. At best it will delay your approval process, in some cases by weeks. Remember, your loan officer wants to make a loan to you. By telling them your complete situation, they will do everything they can to help you get into one of their loan products.

6. Thou shalt NOT stop paying your rent or current mortgage.

One of the key things lenders look at on a credit report is how well you make payments on your current house to determine how likely it is you will make them regularly on your new home. When you build a home and have to borrow to do it, you will have a construction loan. While your home is under construction you will have to make two payments: 1. You will be paying either rent or a mortgage payment on the place you are currently living in. 2. You will be making an interest only payment on the funds withdrawn from your construction loan. Using modular construction to build your new home means it can be completed in several months instead of 9-12 months saving you lots of extra interest payments on a construction loan!

RELATED: DECIPHERING THE ALPHABET SOUP OF HOME LENDING

7. Thou shalt NOT originate any inquiries on your credit.

We all get those credit card offers in the mail: “Get 30,000 airline points by applying for this card today.” Getting an account at a furniture store in preparation for needing new furniture may mean an inquiry on your credit. While getting points or getting prepared to furnish your new home is tempting, don’t do it!  Inquiries on your credit does two things; first it can deduct a few points for each inquiry you have reducing your credit score. If our score was already low it could kick you out of your construction loan qualification. Second, inquiries on your credit tells lenders that you are looking to increase your available credit. An increase in the ability to get into debt can increase your debt ratio. If you are already on the border of not qualifying, this could kill your loan approval chance.

8. Thou shalt NOT make large deposits without first checking with your loan officer.

You would think that a lender would want to see you putting money in the bank. After all, it can make your down payment bigger and reduce their risk on the loan. WRONG! The average person doesn’t make large deposits. They get their paycheck and some occasional outside funds but that is all. When you make a large deposit, it may appear that someone has made a large gift to help you qualify for a loan that you may not have otherwise been able to get. You can’t do that unless your loan program allows it. Lenders want a down payment because putting YOUR money in for the down payment makes you a less risky buyer. Putting someone else’s money down can be seen as a disqualifying gift.

9. Thou shalt NOT change bank accounts or transfer funds back and forth between accounts.

Stability, traceability, and consistency. Remember those three words throughout the loan application process. Banks have to verify the source of funds for your down payment as well as document income. Changing banks accounts or transferring money between them makes that harder to do. Doing it a lot makes it appear something is happening that may not be legitimate. Many times there are legitimate reasons to transfer funds; taking money from a savings account, getting money from a 401k, banks merge and change accounts, etc. The main point is, keep your banking transactions simple and consistent leading up to and during the loan approval process.

10. Thou shalt NOT co-sign on a loan for anyone.

For many, this is hard to do. Parents are asked to co-sign for their child’s student loans, a relative is asked to co-sign to help a family member get a new home, or mom wants to co-sign for a son or daughter to get a new car. Co-signing seems like the nice thing to do… but DON’T! Co-signing can impact you in two very negative ways. First, when you co-sign you are just as responsible for the loan payments as the person that makes them. If they are late or become delinquent it is too late. Your credit is harmed and the damage can be devastating. And even worse, you probably won’t know it happened until you apply for your home mortgage. Second, when you co-sign for debt, it is considered your debt, too. A large student loan can wreak havoc on your debt ratio and easily disqualify you from getting a loan. Getting a student loan paid off can take many years. Co-signing for loans can have impacts on your ability to get a home loan that will last years, or even decades!