When you’re ready to buy a home, one of the first things you need to do is get pre-approved for a mortgage. A pre-approval letter is essential, especially in a competitive market, because it shows sellers that you are serious about buying a home and that you have the financial means to do so.
While having pre-approval will make you more competitive, it’s important to remember that this is not a guarantee that you will receive funding. During the application process, your lender will look at certain factors like your credit rating, income, job, debts, and assets. If any of these criteria change between pre-approval and closing, your loan could be in jeopardy. Here are some reasons why it could happen.
A negative blow to your credit
You don’t need perfect credit to get pre-approved, but you will need to meet your mortgage credit requirements as well as the credit guidelines set by your lender. For this reason, it is important that a buyer fully understands the impact of credit scores on mortgages.
“The credit report obtained during pre-approval is generally valid for 120 days,” said Jim Thelen, mortgage originator at Lake Michigan Credit Union. “If you can’t find a house and close within that time frame, we’ll have to write a new report. If you’ve been behind on your payments, closed accounts, or incurred new debt during this time, it could impact your mortgage score and approval.
An increase in debt
While your lender does not usually issue a new credit report within 120 days, most lenders still do a “soft draw” before issuing a close authorization. The reason is not to get a new credit score, but to see if the borrower has incurred additional debt that could affect their debt-to-income ratio (DTI).
“Let’s say after being pre-approved, a buyer’s car breaks down and they have to buy a new one,” Thelen said. “If they take out a new loan and that loan raises their DTI above the authorized limit, they may no longer be eligible. However, if the borrower is simply exchanging one auto loan for another, that shouldn’t be a problem as long as the monthly payments are similar.
Thelen says a common problem he sees is that buyers take on new debt for things like furniture or appliances for their new home, but he strongly suggests postponing until past the closing date.
“Depending on your overall financial situation, this doesn’t necessarily mean you will be refused, but it is something the underwriter will consider before issuing a closing approval, which could delay closing,” he said. .
A job change
To be approved for a mortgage, you will need to have a history of stable and reliable employment. Changing jobs during the home buying process can potentially lead to closing delays and in some cases can result in your loan being denied. However, the impact of a job change depends on a number of factors, including your lender’s criteria, your mortgage program requirements, your financial situation, and the details of your new job.
Lenders are less likely to balk at a job change if it is in the same industry and comes with a similar or higher salary. For example, if you are a nurse and take a job at a new hospital to do similar tasks, it probably won’t be a problem until there is a drastic change in salary. However, if you make a complete career change or move from a paid position to one based on commission, it is difficult for your lender to judge your future stability.
Other potential problems
Another important “change” to avoid during this time is any undocumented transactions in your bank account. For example, a large cash deposit can be a big red flag, unless you can clearly document where the funds are coming from.
“Your employer’s income or an IRS tax refund will not get a lot of attention because the reference for those deposits is clearly stated,” Thelen said. “However, if your grandparents offer you $ 8,000 for your down payment, you can’t just arbitrarily deposit the money into your account and call it good. There must be documentation.
Why is this important? Because when a lender notices a large cash deposit in your account, they will need to make sure that you haven’t taken on any new loan or debt, that you have no unreported income, and that you have acquired funds from an acceptable source.
Since any type of “change” can lead to potential problems during the mortgage process, most experts advise borrowers to try to maintain the status quo from pre-approval to closing. Sometimes change is inevitable, however, and if so, Thelen says borrowers should immediately contact their lender to see how their loan might be affected.
“The educational part is so important,” he said. “I want borrowers to fully understand their mortgage needs and be aware of the potential pitfalls. This is why my first consultations can sometimes last a few hours. I want to establish good communication and a trusting relationship with my clients so that when problems arise or questions arise, they call immediately and we can work to keep things on track.
For a list of reputable local lenders, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.