6 Moves That Sabotage Mortgage Pre-approval
Published | Written by Caitlin Spence
Lenders want to get the word out about the moves homebuyers can make that hurt their chances of getting a mortgage preapproval, the golden ticket for your house hunt. Sure, sometimes the numbers just don't work but these missteps are fully avoidable! Read on to learn about six common mistakes local lenders are seeing borrowers make — and tips to avoid them:
1. Closing credit accounts
Once you’ve paid off a credit card or revolving debt account, you might be tempted to close the account so you don’t run it up again. But doing so actually hurts your credit. In order to get a mortgage preapproval, you’ll need at least two current lines of traditional credit with at least a two-year payment history; the longer you’ve had them the better.
2. Paying down only high-interest credit cards
Although this is the right approach most of the time, it actually helps more to pay down balances that make up a higher percentage of your available credit, a situation known as a higher credit utilization ratio. When the credit utilization ratio reaches more than 50%, it can damage your chances of getting a mortgage preapproval. For example, if you have a credit card with a $10,000 limit and the balance exceeds $5,000, your credit score is hit pretty hard. Although it’s generally best to have a credit utilization ratio below 30%, if you have high utilization across several credit cards, paying those accounts down at least below 50% can dramatically help your chances of earning your lender’s stamp of approval.
3. Waiting to cash in investments
Generally, you need to have at least three months’ worth of cash reserves available in order to show the lender you can continue making monthly mortgage payments if you lose your income unexpectedly. Securities such as stocks, mutual funds and other investments are counted as part of your asset reserves for mortgage underwriting purposes. However, mortgage underwriters consider their value to be worth only 65% to 75% of their actual value since securities fluctuate and cost money to sell. If you need to beef up your cash reserves, sell your securities at least two to three months before you seek preapproval so the lender will consider their full value.
4. Taking out major loans
This one seems like a no-brainer, but lenders say they see many borrowers make this mistake. Don’t be one of them. Avoid taking out large car or student loans until after your home purchase closes. Otherwise, your debt-to-income ratio will be higher — and your chances of getting a mortgage will be lower.
5. Changing from salary to commission
Mortgage lenders typically require a two-year history of commissions or self-employment income for a mortgage preapproval. If your income is 25% or more based on commission earnings, that means you must have documented proof over two years for loan preapproval.
6. Paying off old debts you don’t need to repay
If you have debts that have been in collections for several years, you may not have to pay them off. It’s possible, depending on your state’s statute of limitations, that the debt is no longer collectible and won’t affect your credit score. In Washington, the statute of limitations on debt collection lawsuits is six years after the date of default or last payment on the debt account.
Next steps for mortgage preapproval
If buying a home is on the horizon, it’s worth sitting down with a mortgage lender now to learn how you can more easily get preapproved when you're ready. If you're looking for recommendations, please reach out. I'm happy to connect you with local lenders that our clients at Lake & Company love working with. Here's to an easy breezy preapproval process!
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