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10 Things to Avoid Before Applying for a Mortgage

10 Things to Avoid Before Applying for a Mortgage

As a homebuyer, you don’t want anything to jeopardize your chances of closing on the home you’ve selected. Many folks can’t buy homes without applying for a mortgage, and if you need one, it’s important to prepare so you’re a good candidate to get a loan. Making any of the following mistakes could reduce the amount of financing you qualify for, result in a higher interest rate on your mortgage or cause a lender to reject your mortgage application. And if you want further expert financial guidance, consider working with a financial advisor who can tailor advice to your specific needs. 

1. Racking up Debt

Taking on additional debt before applying for a mortgage doesn’t make much sense. Your debt-to-income ratio – or how much debt you’re paying off each month in comparison to how much money you’re making – is just one factor that lenders look at when reviewing your mortgage application. If it’s above a certain threshold (typically 43%), you’ll be considered a risky borrower.

2. Forgetting to Check Your Credit

Your credit score says a lot about you. It lets a lender know whether you’re fiscally responsible and indicates the likelihood that you’ll be able to pay off your debts in the future. Since it’s often one of the criteria that lenders use when approving homebuyers for mortgages, it’s a good idea to check your score before filling out an application for a home loan.

3. Falling Behind on Bills

10 Things to Avoid Before Applying for a Mortgage

Since credit scores matter to lenders, it’s best to work on improving your score and protecting it before you try to get a mortgage. That means that you don’t want to do anything that could potentially hurt your score, like missing bill payment deadlines.

Many lenders use the FICO scoring model, and submitting just one check after the due date can knock quite a few points off your credit score. If history shows that you can’t pay your bills on time, your lender will likely assume that you’ll make late mortgage payments too.

4. Maxing out Credit Cards

Exceeding your credit card limit or swiping your card too often will hurt your credit score as well. One thing that affects your score is your credit utilization ratio (or your debt-to-credit ratio). That’s the amount of credit you’ve used relative to your credit line. For example, if you’ve charged $5,000 to a credit card and you have an $8,000 credit limit, your debt-to-credit ratio is 62.5%.

Ideally, that ratio shouldn’t rise above 30%. And if you’re in the market for a new home, it’s important to keep it as low as possible.

5. Closing a Credit Card Account

If you’re mired in credit card debt, you might think that closing an account will improve your credit score. But that’s not necessarily true.

There are certain situations where shutting down a credit card account might be a smart move. If you need a mortgage, however, it won’t do you any good. By getting rid of a credit card and reducing your level of available credit, your debt-to-credit ratio could skyrocket. And as a result, your credit score could sink.

6. Switching Jobs

Making a career change weeks before meeting with a lender might hurt your chances of qualifying for a mortgage. A lender is going to want to make sure you have a stable source of income and you can afford to pay a mortgage bill every month. If you start a new gig right before you begin your mortgage application, you might not even have a pay stub to show your lender how much you’ll be bringing home going forward.

7. Making a Major Purchase

Buying something big – like new appliances or a new car – could lead a lender to reject your mortgage application. You’ll need to have a lot of cash on hand when you’re buying a house so that you can pay for your down payment, closing costs and insurance. What’s more, if you have to take out a loan or swipe a credit card to make that purchase, that’s could affect your credit score if you can’t pay the bill in full on time or your debt-to-credit ratio rises.

If you’re tired of renting and you’re ready to buy a house, it’s best to try and reduce your financial obligations before applying for a mortgage.

8. Marrying Someone With Bad Credit

10 Things to Avoid Before Applying for a Mortgage

It’s not uncommon for couples to buy homes after tying the knot. Keep in mind, however that if you’re getting the house together, both of your credit scores and financial histories could be taken into account. If you’re marrying someone whose credit isn’t in tip top shape, it might be a good idea to work on improving his or her score (and paying off the wedding loan or extra debt you both took on) before trying to get a home loan.

9. Co-Signing on a Loan

It’s important to think carefully before agreeing to co-sign a loan for a child in college or another family member, particularly if you’re trying to become a homeowner. By co-signing, you become partially responsible for that debt. If the borrower can’t keep up with payments and defaults, your credit score could dip substantially.

10. Making Big Deposits

Your relatives can help you pay for your down payment. But there are rules that go along with down payment gifts. You can’t deposit the money into your account without properly documenting it.

Generally, making a large deposit into your bank account prior to visiting a mortgage lender won’t look good. Lenders normally want to see that you have plenty of money in your account that’s been there for at least two months.

Bottom Line

If you can’t buy a house without getting a mortgage, it’s in your best interest to avoid any moves that could prevent you from qualifying for one. The main thing is to not do – or fail to do – anything that might raise a red flag for an underwriter seeking to determine whether you are a worthwhile risk.

Tips on Getting a Mortgage

  • A financial advisor can help you prepare for a mortgage application. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Use our no-cost mortgage calculator to estimate your monthly mortgage payment with taxes, fees and insurance.
  • SmartAsset’s mortgage comparison tool let’s you compare mortgage rates from top lenders and find the one that best suits your needs.

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