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Know This Before You Talk Mortgage

Mar 19, 2020 3 min read

Key Takeaways

  • Undocumented bank deposits could derail your home loan.
  • Say no to other credit offers during your mortgage app.
  • Set your borrowing bar below 30% of available credit.

Few homeowners will let you in on this important little secret: a lot of sweat equity is required at the onset of the home buying process.

Whether logging late nights at the office or cutting back on large expenditures, you likely had to plan and save for that 5-20% down payment on your new home.

Despite a favorable lending outlook, it’s beneficial to play by the lenders' rules when applying for a home loan, both before the mortgage application process and — don’t forget this — during the process.

Read on for tips to get you on the path to homeownership by avoiding these five common warning flags that often lead to lending delays.

1. Making large deposits without documentation

When you are buying a home, your mortgage broker needs to make sure that no other lenders have a claim on the property.

For this reason, large deposits can sometimes become a red flag, but only if the lender isn’t provided a suitable explanation for them.

Small gifts from parents, grandparents, or other family members are normally acceptable, but if you deposit significant funds (half your monthly income or more), your loan officer will want to be sure that the money is a gift and not a loan.

If you’re unable to generate a gift letter or other necessary documentation, the lender may assume the funds were borrowed, effectively slowing the loan approval process.

2. Applying for new credit during mortgage approval

When you seek out new lines of credit while the mortgage approval is pending, the mortgage process could stall.

Lenders often check credit reports for new accounts up to the 11th hour. Think twice about that extra 15% off that the department store is tempting you with: even if you open an account and use it for a one-time discount, you will likely still be penalized.

Lenders typically pull a credit update within 10 days of closing. There, your new credit activities will show up, which could take you from cleared-to-closed category all the way back to step one.


3. Racking up a high credit utilization ratio

Surprisingly, the actual amount of debt is not what lenders consider closely. Rather it is the ratio of existing debt to the available credit that matters. For example, if you owe $100 on your credit card and have a $1,000 credit limit, your ratio is 10%.

For optimal results, experts advise keeping your credit utilization ratio below 30%. In other words, if your available credit is $35,000, lenders would like to see a balance of $10,500 or less. A thoughtful strategy is essential, and this useful home budget analysis calculator Opens in new window is a great place to start.

4. Having an erratic employment history

Loan officers like to see a long-term, stable history of employment. An employment history with sudden job changes, periods of unemployment, or an inability to demonstrate stable income can stall the approval process quickly.

Some employers have HR departments equipped with representatives qualified to discuss life events including home affordability, homeowners insurance needs, and home and auto loan incentives.

Did you know that most lenders will allow you to use your 401(k) assets as proof of reserves? If you’ve been maximizing your 401(k) contributions, your growing balance will prove helpful in the lending process, and if you’ve contemplated increasing your contribution rate, this might be an opportune time to do so.

5. Making late payments

Last but not least, lenders like to see a history of responsible debt behavior. What this means: They will not turn a blind eye to a history of late payments or defaults.

Though commonplace among the majority of modern households, a history of late payments can halt your hopes of borrowing money for a new home.

However, it is never too late to start improving your chances of loan approval.


What you can do next

Financing your first home demands a solid financial foundation — and a track record of stable employment, timely bill payments and manageable use of credit. Make sure you know some common red flags to avoid before you talk to a lender.


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