Providing an accurate picture of your personal finances — such as your income, debt and assets — helps a bank estimate how much you can borrow for a house. And when you have an idea of how much you can spend, you don't waste time looking at houses outside your price range. But just because a lender prequalifies you for a mortgage doesn't guarantee that you'll make it to the closing table.
Financially, a lot can happen between pre-qualifying and closing on a mortgage loan. Some prospective buyers make the mistake of thinking that a pre-qualification solidifies the deal. However, a mortgage isn’t guaranteed until you sign your name on the dotted line. If you provide the lender with accurate information and your finances and credit remain relatively the same through the process, you probably have nothing to worry about. But if a major change does occur, it can potentially jeopardize your mortgage.
If you don’t want any surprises or bad news, here are four things to avoid after getting pre-qualified for a mortgage.
1. Don’t Change Your Employment Status
If you’re thinking about a job switch, or if you’re contemplating quitting your job to start your own business, wait until after closing on your mortgage.
Your mortgage pre-qualification is based on the financial information given to the bank. Any changes to this information can bring your mortgage to a screeching halt. Switching jobs won't necessarily kill the mortgage deal, especially if you’re working in the same field and earning the same income. Just know that the bank will need your updated income information to make sure you’re still eligible. Typically, getting a mortgage requires at least two years of consecutive employment, and your income needs to remain roughly the same or increase.
But while switching a job may not ruin your pre-qualification, quitting your job and becoming self-employed is a completely different story. Self-employed people can qualify for mortgages, but they need two years of tax returns to prove that their business is profitable, and that their income can support a mortgage loan. So even if your company is profitable, most banks won’t touch you until you’ve been in business for at least two years.
2. Don’t Let a Negative Item Hit Your Credit Report
Are you going back-and-forth with a creditor over whether you owe a debt? If so, make sure you resolve the issue before getting pre-qualified for a mortgage. The bank might give you the green light to shop for a home under the assumption that you have a good credit history and no recent negative items on your credit report.
If a creditor reports a negative item to the bureaus after you’re prequalified, the lender might pull out and cancel the mortgage depending on the severity of the negative item and how much it affects your credit score.
3. Don’t Increase Your Debt-to-Income Ratio
Prequalifying for a mortgage requires a reasonable debt-to-income ratio. This refers to your monthly debt payments in relation to your monthly income. For a conventional mortgage, lenders typically prefer a debt-to-income ratio of no more than 36%, whereas FHA loans allow a debt-to-income ratio up to 43%.
Any new debt you acquire after getting prequalified can potentially jeopardize your mortgage — especially if you barely qualified for the loan. Once you’re prequalified, this isn’t the time to take on new debts. Financing a car, furniture, electronics and even cosigning a loan can increase your debt-to-income ratio.
Cosigning a loan might seem harmless, and you might argue that you’re not the one making the monthly payments. But from a lender’s standpoint, you might as well be the primary signer. Cosigning your name to any type of loan makes you liable to a certain degree. It doesn’t matter if it’s your child, a sibling, your parent or a best friend — under no circumstances should you cosign a loan. Of course, life doesn’t always go perfectly, and you might find yourself unexpectedly shopping for a car after getting prequalified for a mortgage. In this case, speak with your lender first to see how much wiggle room you have.
4. Don’t Blow Through Your Savings
Your lender might provide an estimate of how much you need for closing costs and a down payment. Realize, however, that this is only an estimate, and the actual cost can fluctuate up or down.
Even if you think there’s more than enough in your account for mortgage-related expenses, don’t go on a shopping spree and start buying furniture for your new house. You won’t know how much you’ll actually need until everything’s said and done. If you start blowing through your cash, any increase in your out-of-pocket expense can throw you for a loop. You might have to postpone closing, and you could potentially lose the house.
Just because a lender prequalifies you for a mortgage doesn't guarantee that you'll make it to the closing table.
For more details on mistakes to avoid while buying a home, read more here.
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