Getting approved for a mortgage is about more than just having money in the bank. Get the scoop on five surprising stumbling blocks when applying for a mortgage…so you’ll know how to avoid them.
So you’ve saved up for a down payment and you’re ready to buy a house. If you’re like most Americans, your ability to become a homeowner will depend on your approval for a mortgage loan. And as the mortgage industry has become increasingly regulated, there are numerous opportunities for mortgage loans to be denied or fall through.
“There are so many checks and balances right now in the mortgage industry,” says Peter Costakos, branch manager of Mortgage Master in Brooklyn, New York. “We’re not going to miss anything, so consumers have to really be prepared and communicate openly with their lenders all the way up through the closing to avoid disaster.”
To boost your chances of mortgage approval—and to avoid surprising dealbreakers before the closing — watch out for these five mortgage disqualifiers.
Potential Dealbreaker #1: You didn’t communicate openly with your spouse.
If you’re purchasing a home with a spouse or partner, it’s crucial to communicate with each other about any debts, late payments or other issues that might affect your credit and your ability to gain mortgage approval. Couples frequently apply for mortgages and learn through the process that “one spouse has an overdue account that the other spouse doesn’t even know about,” says Don Frommeyer, senior vice president of AmTrust Mortgage Funding in Carmel, Indiana, and president of the National Association of Mortgage Brokers.
In some cases, those secret debts can cause couples to be disqualified for the mortgages they seek. “Some clients ask us not to tell their spouses about certain balances they owe,” Frommeyer says. “But that’s all going to come out in the credit report and the application process. It’s best to be upfront with your spouse about what is and isn’t owed, so there are no surprises in the mortgage office.”
Potential Dealbreaker #2: You switched jobs.
If you’ve gone through a loan pre-approval process, which most lenders recommend before making an offer on a home, don’t make any big changes—such as a job change—until after your loan is closed. If you do, all the employment and salary data that your loan was based on is no longer accurate and you’re no longer approved.
“After closing, do whatever you want,” Costakos says. “But until the ink is dry [on your loan], keep your current job. Most lenders require mortgage companies to verify your employment all the way up to closing.”
If you’re not yet pre-approved but plan to buy a home soon, Frommeyer recommends staying in your job for awhile to show longevity. “If you are a commission salesperson, you’re likely going to have to have the same job for two years to get approved,” Frommeyer says.
Potential Dealbreaker #3: You applied for new credit.
If your mortgage loan is in process, do not apply for new credit, as opening new credit accounts leaves you susceptible to more debt and could disqualify you for your mortgage. “Lots of people want to go shopping, buy a new couch before they move in, or get a new car to put in the new driveway,” Costakos says. “But I tell clients to look as much as they want; just don’t seal the deal until your home closes.”
Even if applying for the new credit doesn’t disqualify you for your mortgage, it will “add weeks or months to the process,” Costakos says. “There’s a compliance check for everything along the way, so somebody will be looking at your credit again and will see the new debt.”
Potential Dealbreaker #4: You made a large, untraceable deposit.
When you are approved for a mortgage, you’re required to provide bank statements and evidence of all assets. If you make a large, non-payroll deposit into your bank account before the loan is closed, you’ll open yourself up to scrutiny, Costakos says.
“Cash deposits can jeopardize your loan, so all large deposits have to be verified,” Costakos adds. “Maybe Mom gave you $5,000 as a congratulations gift for buying a house. That’s fine; you just have to have a paper trail.” From the mortgage company’s perspective, that large deposit could represent borrowed funds, a cash advance from a credit card, or something else that may affect your ability to repay your loan.
Potential Dealbreaker #5: You didn’t tell the truth.
A client recently applied for a mortgage to purchase a new home as a “primary residence,” Costakos says. The problem? She wasn’t actually planning to live in the home, but didn’t want to pay higher taxes and insurance for a secondary residence. Although mortgage companies have always been required to follow up and ensure that borrowers were actually living in the homes they claimed, it used to be much easier for consumers to get away with such untruths. Today, however, mortgage companies can find out “in seconds” where a client is living, based on online utility records and other public records, Costakos says.
When applying for a mortgage, “don’t ever lie,” Costakos says. Once the lie is found out, mortgage companies will revoke the mortgage and require borrowers to reconfigure the loan at significant cost to them.
Is home ownership in your future? Understanding the potential pitfalls that could derail your mortgage can help you make the right decision.
Freelance journalist Nancy Mann Jackson writes regularly about personal finance, small business, health care and education. Her work has appeared in Entrepreneur, CNNMoney.com, Bankrate, Working Mother, and many other publications. She lives in Alabama with her husband and their three boys.