Almost everyone who buys a house needs a home loan. If you’re in the market for a new home and you want to show lenders you’re a safe bet, what should you do? Some answers are obvious. Others, not so much.
Basically, lenders want to know how much money you have, how much money you’ll make, how much you owe, whether your income is stable, and how likely you are to make the payments. They determine answers to these questions in a variety of ways.
Don’t Get a New Job
Once you give them permission, lenders verify how much money you have and how much you owe by reviewing your bank accounts, credit card statements, recurring bills, and other documents. They also verify your income, but they don’t stop there. They like to know how long you’ve worked in your field and how long you’ve been with your current employer. If you’ve recently changed jobs, and especially if you’ve changed industries, you pose a greater risk than someone who has been in the same job for years–even if your income is higher. New jobs don’t always work out and lenders don’t want to be left holding the bag once the honeymoon period for the new job ends.
Don’t Quit Your Job
If your loan was pre-approved based on a two-income household, neither of you should quit your job before escrow closes (even if you and your spouse have done the math and you know you can make loan payments on only one of your two salaries). Many lenders verify employment more than once. If you were pre-approved months ago, the lender may call to confirm employment immediately prior to the close of escrow. No employment? No loan.
Don’t File for Bankruptcy
I feel like this goes without saying, but don’t file for bankruptcy while you’re trying to get approved for a home loan. As with income verification, lenders often check to make sure no major financial changes have occurred before the final close.
Don’t Apply for New Credit
Lenders want to be sure you’re not overextended, which means they get nervous if you apply for additional credit while you’re trying to get approved for a home loan. Don’t go get a car loan, a new cell phone, or anything else that requires regular payments, even if you can afford it. It will drop your credit score, which is a proxy to measure your creditworthiness.
Although many of the factors that determine your credit score are easy to understand, the specific algorithm to determine your FICO score (credit score) is a closely guarded secret. For no discernable reason, if your overall available credit remains the same but you switch credit card companies, your credit score drops. So, don’t choose this moment to cancel your current credit card and pick a new one.
Don’t Move Money Around
If you are lucky enough to have friends or family willing to provide some financial support to help you buy your new home, ask them to wire the money straight to your escrow account (and if you plan to wire money, please read my previous article, Avoid Wire Fraud, so your money goes where it should). When you start transferring large sums of money between accounts, lenders get nervous.
I have kind of a crazy story about moving money and balance fluctuations. Years ago, I applied for a loan to refinance my home. It was approved, no problem, but at the last minute, they did a credit check and discovered a significantly higher balance on my credit card. This was not unusual; the same fluctuation occurred every month—put expenses on the card and pay them off at the end of the month. However, by the time the lender got in touch to ask me what had happened, his bank’s underwriting requirements changed and I no longer qualified for the loan. This is really rare, but it goes to show that stability is key when applying for a loan.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.