The Credit Monkey receives more inquiries about the mortgage process than any subject other than credit repair. The questions are straightforward and usually have simple answers. The questions are almost always the same. To help his readers avoid the pitfalls of unanswered questions, the Monkey created these 9 Simple Tips for a Smooth Mortgage Closing. (Thanks to the Credit Monkey’s friend Ean Kofsky at Fulton Mortgage for this blog idea.)
Don’t Apply For New Credit
Applying for a new credit card triggers the card issuer to pull your credit report. The new credit pull will adversely affect your credit score. To put it plainly, a new credit card application will reduce your credit score even if you don’t use the credit card. This is particularly bad because your interest rate may increase. Or even worse, when a lower credit score could cause your mortgage to be denied.
Likewise, don’t establish new lines of credit for furniture, appliances, computers or vehicles. You’ll have plenty of time late to do that after closing. The new debt will be factored into your debt-to-income ratios by the mortgage company. Before acting, know that new debt may affect your mortgage qualification. No qualification equals no new house.
Don’t Close Credit Cards or Consolidate Debt
Closing a credit card account can affect your credit utilization. Simply put, credit utilization is the percentage of credit used compared to how much credit is available. When you closed an open account, your total available credit is reduced by the amount of the credit limit for that card. If it is a low or zero balance account, the account will drive your credit score higher. Closing that account will drive your credit score lower.
Consolidating credit card or other debt, although it may make good business sense, affects credit utilization. Regardless of how many zero interest offers you receive, just say no until after you close on your new home. Don’t create new problems where none existed.
Don’t Max Out Credit Cards or Go Over Limits
Running up credit card debt is the fastest way to drag your credit score down, even if you never miss a payment. Try to keep your credit cards balances below 30% of the available credit limits at all times during the mortgage process. If that percent sneaks up, your credit score will sneak down. Better yet, don’t use your credit cards until after closing.
Don’t Raise Red Flags
Underwriters don’t like change. So, don’t change anything you control.
Don’t change your name.
Don’t change your address.
Don’t co-sign for another loan.
So you know, a mortgage underwriter investigates your mortgage application and its associated documentation to determine its truthfulness. The underwriter also analyzes the terms of your mortgage programs to insure that you are within it guidelines.
Don’t Deposit Cash
In most cases, cash on hand (e.g. money kept in a safe under your bed or in a coffee can on a shelf) and unsecured funds (cash that miraculously shows up from an unknown source) are not an acceptable source for your down payment or your closing costs.
Even when from the source of cash comes from an acceptable source, any large or unusual deposits need to be documented with a paper trail. If the source of funds is not permitted by law or guideline, you will not be permitted to use those funds as a deposit or for cash at closing.
Don’t Change Jobs or Accept a Voluntary Layoff or Reduction in Hours
Such changes could potentially make the difference between a mortgage approval or a denial. Continue working in the same manner as before you applied for the loan.If you must change jobs, call you loan officer before making the change. A telephone call could save your mortgage.
Keep All Accounts Current
Late payments on your existing mortgage, auto loan, or any other account reported to the credit bureaus may disastrously affects on your credit score. FYI, with most mortgage programs, you will be declined if you have even a single late mortgage or rent payment during the prior twelve months.
Call Your Loan Officer
If you have any doubt about how your actions may affect your credit, call your loan officer. A two minute telephone call could save you hours of work correcting a mistake, if correction is even possible.
Make Account Changes at Least 60 Days Before Applying
A house isn’t an impulse purchase. Most people spend months preparing both home and personal finances before contacting a Realtor. During that preparation period you can open and close accounts or consolidate debt as needed. You have carte blanche as long as it doesn’t lower credit score long-term. If you have cash in your mattress that you need for a down payment or for closing, deposit it then. Should you need to borrow a few dollars from a family member or sell a few things to feel financially secure during closing and immediately thereafter, the is the time to do it. Just make sure the funds are deposited more than sixty days before you apply for a mortgage.
Here’s why you should take time to prepare before your loan application. Your creditworthiness is established at the time your credit report is pulled by your loan officer for your pre-qualification letter Whatever happened before that first credit report is pulled is inconsequential. It’s in the past.
If your credit score needs a little work, you work from the date of the original credit pull forward. The mortgage company doesn’t know what happened before then and your credit reflects only what is in the past. It does explain why. The lender considers only the credit information on its most recent credit pull. For the most part, the lender doesn’t care about the past. Why should you?
When you apply for a mortgage, your loan officer will require your last two months of bank statements. That’s about 60 days worth of deposit and withdrawal history. Any deposit or withdrawal before then is considered old business. The lender considers changes before that two month period as ancient history. Accordingly, any account changes you made before then are not present history and for the purposes of a mortgage are inconsequential.
Follow these 9 Simple Tips to reduce the stress normally associated with real estate closings. In the Monkey’s experience, almost every difficult real estate closing resulted from the buyer ignoring one or more of these tips. Heed these tips and make purchasing your new home exciting and not torture
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