What Not to Do When Applying for a Home Loan
Buying a home is an exciting milestone, but the process leading up to loan approval can feel overwhelming. Many buyers focus on what they should do when applying for a mortgage, such as saving for a down payment or improving their credit score. However, understanding what not to do is just as important. Even well-intentioned financial decisions can delay or derail your loan approval if they raise red flags for lenders.
Understanding Debt-to-Income Ratio (DTI)
One of the most important factors lenders evaluate is your debt-to-income ratio, commonly referred to as DTI. This ratio compares your monthly debt obligations to your gross monthly income. It helps lenders assess whether you can comfortably afford your mortgage payment in addition to your other financial responsibilities.
For example, if your total monthly debts equal $2,000 and your gross monthly income is $6,000, your DTI is approximately 33 percent. Most lenders prefer a DTI below a certain threshold, as higher ratios suggest greater financial risk. Any change that increases your monthly obligations or reduces your income can negatively impact this ratio and, in turn, your loan approval.
Avoid Large Deposits or Withdrawals
Once you apply for a mortgage, your bank statements will be closely reviewed. Large or unexplained deposits and withdrawals can raise concerns about the source of funds or financial stability. Lenders need to verify that your money is coming from legitimate, documented sources and that you are not taking on undisclosed debt.
If you must move funds or receive a large deposit, always consult your lender first. Even transferring money between personal accounts can create unnecessary complications if not properly documented.
Do Not Change Jobs During the Process
Employment stability is a key factor in mortgage approval. Changing jobs while your loan is being reviewed can create delays or require additional documentation. Even if the new position offers higher pay, lenders may view the change as increased risk, especially if it involves a new industry, commission-based income, or probationary period.
Ideally, remain with the same employer until after closing to avoid any disruptions in the approval process.
Avoid Opening New Credit or Taking Out Loans
Opening a new credit card or taking out a loan can significantly impact your credit score and DTI. Even if you do not immediately use the credit, the available balance and potential payment obligations are considered by lenders.
New credit inquiries can lower your score, and additional monthly payments may push your DTI beyond acceptable limits. It is best to pause all new credit activity until after you have closed on your home.
Don’t Make Large Purchases
Large purchases such as a car, boat, furniture, or major appliances should wait until after closing. These purchases often involve financing, which increases your debt load and can negatively affect your loan approval.
Even cash purchases can be problematic if they significantly reduce your available funds or raise questions about financial reserves. Lenders want to see consistency and stability throughout the loan process.
Do Not Move Money or Change Banks
Switching banks or moving money between accounts may seem harmless, but it can complicate the verification process. Lenders typically request multiple months of bank statements, and changes can trigger requests for additional documentation or explanations.
Keeping your financial accounts consistent and unchanged helps ensure a smoother underwriting process.
Don’t Pay Bills Late
Timely payments are critical during the mortgage process. A single late payment on a credit card, loan, or utility bill can negatively affect your credit score and raise concerns for lenders.
Continue paying all obligations on time, just as you would before applying for a loan. Consistency is key.
Avoid Changes to Marital Status
Changes in marital status, such as marriage or divorce, can affect income, debt, and legal obligations. These changes may require updated documentation and can complicate the loan process.
If possible, avoid making changes to your marital status until after closing to prevent delays or reassessments of your financial profile.
Final Thoughts
Applying for a home loan requires patience, discipline, and consistency. While it may feel restrictive, avoiding these common mistakes can make the difference between a smooth closing and unnecessary stress. The goal is to present a clear, stable financial picture to your lender from application to closing.
