Home Financing

You did it—you worked hard and you're finally ready to apply for a home loan. The dream of homeownership is within your reach. While it's exciting to start planning the next chapter of your life, some actions could give the underwriter the impression that you may be too risky for loan approval.

To avoid jeopardizing your loan status, here are six things you should never do after applying for a home loan.  

Don't apply for new credit

Your credit can be pulled at any time throughout the application process, and any major change could affect your FICO® score. Inadvertently lowering your score and/or changing your debt-to-income ratio could hurt your chances of getting the loan that you want.  

Don't miss any payments

Keep paying your bills on time—especially other credit and loan payments. Payment history is a huge factor in your credit score, and late payments can do a lot of damage. Keeping up with your payments is good advice at any time, but it's especially important when you're waiting on loan approval.  

Don't make major purchases

It might be tempting to run out and start shopping for new furniture—but if you're waiting on loan approval, put that wallet away. Charging substantial purchases will increase your debt-to-income ratio and credit utilization. Any major purchase, even unrelated to your home (like a car), can impact your credit score and affect your loan status.   

Don't make large unexplained bank deposits

Part of the loan officer's job is to source your money, so if you make a big deposit (typically over $1,000) that isn't your usual paycheck, it's going to send up a red flag. We aren't saying you need to stash that money under your mattress until your loan is approved, but always talk to your loan officer about how to properly document your transactions.

Don't change jobs

We realize that this one might be out of your hands in some cases, but if you can help it, don't switch careers (or employers) while you're waiting for loan approval. Lenders are looking for consistent income, so changing jobs in the middle of the loan process could result in revisions to the amount you're approved to borrow. 

Don't close out any credit accounts

This might feel counterintuitive—wouldn't having LESS debt be better? Not in this case. Closing accounts will set off a chain reaction that reduces your available credit and raises your debt-to-income ratio. It can also affect your credit score by changing the landscape of your credit history. Both of these things can put your loan approval at risk.

The Bottom Line

ANY change in credit, income, and assets should be handled in a way that won't jeopardize your home loan approval. The best thing that you can do is be transparent and discuss any significant financial changes with your loan officer. They have the skills and knowledge to help guide you through the entire process, even if there are a few bumps along the way.

The Masiello Group is a second-generation family company that has been a trailblazer in New England real estate since 1966. With now more than 35 offices throughout northern New England, we're the largest residential real estate firm north of Boston to offer a complete suite of home services, including buying, selling, mortgage, title, insurance, relocation, and more. 

Our agents are eager and excited to meet your real estate needs! 

You can find more information on today's market and other real estate trends by reading our blog weekly at https://www.masiello.com/news-and-updates/. 

Buying a home is an exciting adventure! According to NerdWallet's 2020 Home Buyer Report, about 99.3 million Americans plan to purchase a home in the next few years. Today, as we begin to return to normal, the Federal Reserve is signaling that interest rates are on the way up.

If you're one of the 99.3 million, or if you already have a home with a variable rate loan, you need to take steps today to secure the best mortgage rate possible. Here are some steps to take to help you prepare to apply for a mortgage.

Preparation is the Key

Taking simple steps before applying for financing can help you get the best mortgage interest rate. It can save you real money over the long term. Here are some tips that can help whether you're buying a home or refinancing a variable-rate mortgage.

• Check Your Credit Scores and Reports

Any effort to secure the best interest rate possible begins with your credit. Start by checking your scores and reports with Experian, Equifax, and TransUnion. Check for any inaccuracies in your credit report that may be dragging down your score.

• Work on Your Score

If your credit score is below 760, it's worth taking the time to improve your score. Take steps to pay down balances and clean up any inaccuracies on your credit report. Having excellent credit will make you eligible for the lowest mortgage rate.

• Save For a Bigger Down Payment

Lenders look favorably on buyers who put down a larger down payment. With a lower down payment, your lender may require private mortgage insurance. Typically, this is the case if you put down less than 20%. However, a larger down payment can help you to avoid PMI costs. Plus, a larger down payment can also get you a lower interest rate.

• Consider a Shorter Loan Term

The interest rate on a 15-year loan is lower than a 30-year loan. A shorter-term loan can save you tens of thousands of dollars in interest payments over the curse of the loan.

• Decrease Debt

Decreasing your debt can improve your debt-to-income ratio. Banks measure this important ratio when issuing a mortgage. Combining paying down debt with increasing income can significantly affect your credit score.

• Apply with at Least Three Lenders

There are literally thousands of mortgage lenders competing for your business. Another way to assure the lowest rate is to apply with at least three lenders and see which offers you the lowest rate.

Five Questions To Consider Before You Choose A Lender

The first step is to figure out what you can afford. Then you need to begin the search for a lender offering a great rate.

Understanding what you can afford when buying a home is a critical first step.

Answering the following questions can help you to define your needs.

• Fixed or Adjustable-Rate Mortgage?

Mortgages either have a fixed interest rate or an adjustable rate.

A fixed-rate loan locks you into a consistent interest rate for the entire term of the loan. The portion of your payment that goes toward principal plus interest remains constant. However, insurance, property taxes, and other costs can vary.

The interest on an adjustable-rate loan can change over time. Most ARMs begin with an introductory period of 10, 7, 5, or 3 years, during which your rate remains stable. After that, your rate may change periodically.

• Should You Pay Points?

Discount points are fees borrowers pay to reduce the interest rate on their mortgage. One point is equal to 1% of the loan. Each point reduces the mortgage rate by .25%. However, the rate can vary. When you pay points, you are paying thousands of dollars upfront to save a few dollars each month. It takes several years for the monthly saving to add up to where they exceed the initial amount paid upfront.

• What are Closing Costs

Closing costs are charged by the lender and other parties. They do not affect the mortgage rate (unless you're paying points). But they do impact your expenses. Closing costs are typically around 3% of the purchase price of your home and are paid at the time you close.

• What About First-Time Home Buyer Programs?

Before choosing a mortgage, find out if any special programs can make homebuying less costly. Each state offers its own mix of programs, for example, first-time buyer programs or professionals like teachers, first responders, or veterans.

• How Much Will You Put Down?

Some groups like Veterans may qualify for 100% financing. Other mortgages only require a down payment as low as 3% or 3.5%.

VA Loans – If you or a spouse are active military or a veteran you may qualify for a no down payment VA loan.

USDA Loans – If you live in a rural area, the Department of Agriculture might guarantee a low or no-down-payment loan, and even help cover closing costs.

FHA Loans – Mortgages insured by the FHA allow down payments as low as 3.5% and are more forgiving of low credit scores, but you will pay more in insurance over the life of the loan.

Comparing Loan Offers

Applying with multiple lenders means you'll need to compare loan offers. Here are a few tips for comparing offers.

• Lenders offer Different Mortgage Rates

by applying with multiple lenders, you'll receive different rates. The more you shop, the more you might be able to save. Apply with different types of lenders, such as a bank, a credit union, and an online lender so you can compare offers.

• Shop for Loans Within a Set Time Frame

The big three credit bureaus encourage you to shop for the best rate. You typically have 14 to 45 days, depending on the scoring model, to apply for as many mortgages as you want with the same effect on your score as applying for a single loan.

• Compare Closing Costs

Each lender is required to provide a loan estimate form that details the terms and fees of the loan. The loan estimate is designed to simplify comparing mortgages.

Taking the time to prepare and get your financial information in order by paying down debt, checking your credit scores and reports with the big three, and saving a bigger down payment can help you to get the best possible mortgage rate. Speak with your accountant and your realtor to learn about all of your options.

Getting a lower mortgage rate can save you thousands of dollars throughout your loan term. It's worth taking the time and effort to educate yourself and get your financial house in order before you begin applying for a loan.