10 Things to Avoid Before Applying for a Mortgage

As a homebuyer, you don’t want anything to jeopardize your chances of closing on the home you’ve selected. Many folks can’t buy homes without applying for a mortgage. If you need one, it’s important to prepare so you’re a good candidate to get a loan. Simple mistakes could reduce the amount of financing you qualify or result in a higher interest rate on your mortgage. Some may even cause a lender to reject your mortgage application outright.

A financial advisor can review your mortgage options and build a roadmap that gets you closer to your dream home.

1. Racking up Debt

Taking on additional debt before applying for a mortgage doesn’t make much sense. Lenders look at your debt-to-income ratio when reviewing your mortgage application. If the money you pay in debt relative to your monthly earnings exceeds a certain threshold (typically 43%), you’ll be considered a risky borrower.

2. Forgetting to Check Your Credit

Your credit score says a lot about you. It lets a lender know whether you’re responsible enough to pay off your future debts. It’s often one of the main criteria that lenders use when approving homebuyers for mortgages. Make sure to check your score before filling out an application for a home loan.

3. Falling Behind on Bills

Work on improving, and protecting, your credit before you try to get a mortgage. That means that you don’t want to do anything that could potentially hurt your score, like missing bill payment deadlines. Many lenders use the FICO scoring model. Submitting just one check after the due date can knock quite a few points off your credit score. If history shows you can’t pay your bills on time, your lender likely assumes you’ll make late mortgage payments too.

4. Maxing out Credit Cards

Exceeding your credit card limit or swiping your card too often will hurt your credit score as well. One thing that affects your score is your credit utilization ratio (or your debt-to-credit ratio). That’s the amount of credit you’ve used relative to your credit line. For example, if you’ve charged $5,000 to a credit card and you have an $8,000 credit limit, your debt-to-credit ratio is 62.5%.

Ideally, that ratio shouldn’t rise above 30%. And if you’re in the market for a new home, it’s important to keep it as low as possible.

5. Closing a Credit Card Account

If you’re mired in credit card debt, you might think that closing an account will improve your credit score. But that’s not necessarily true. There are certain situations where shutting down a credit card account might be a smart move. If you need a mortgage, however, it won’t do you any good. By getting rid of a credit card and reducing your level of available credit, your debt-to-credit ratio could skyrocket. And as a result, your credit score could sink.

6. Switching Jobs

Making a career change weeks before meeting with a mortgage lender might hurt your chances of qualifying for a mortgage. A lender is going to want to make sure you can afford to pay a mortgage bill every month. If you start a new gig right before you begin your mortgage application, you might not even have a pay stub to show your lender how much you’ll be bringing home going forward.

7. Making a Major Purchase

Buying something big – like new appliances or a new car – could lead a lender to reject your mortgage application. You’ll need to have a lot of cash on hand for your down payment, closing costs, and insurance. What’s more, if you have to take out a loan or swipe a credit card to make that purchase, that could affect your credit score. If you can’t pay the bill in full on time then your debt-to-credit ratio rises, too. If you’re ready to buy a house, it’s best to try and reduce your financial obligations before applying for a mortgage.

8. Marrying Someone With Bad Credit

It’s not uncommon for couples to buy homes after tying the knot. Keep in mind, however that both of your credit scores and financial histories could be taken into account. If your spouse has bad credit, improve their score (and pay off the wedding expenses) before applying for a mortgage.

9. Co-Signing on a Loan

If you want a mortgage, think carefully before agreeing to co-sign a loan for anyone. By co-signing, you become partially responsible for that debt. This could be a child in college or another family member in need of help. If the borrower can’t keep up with payments and defaults, your credit score could dip substantially.

10. Making Big Deposits

Your relatives can help you pay for your down payment. But there are rules that go along with down payment gifts. You can’t deposit the money into your account without properly documenting it.

Generally, making a large deposit into your bank account prior to visiting a mortgage lender won’t look good. Lenders normally want to see that you have plenty of money in your account that’s been there for at least two months.

What to Do If You Have Already Made One of These Mistakes

If you have already done something on this list, it does not necessarily mean you cannot get a mortgage. The impact depends on what happened, and when. A single late payment from six months ago will hurt less than one from last month. Late payments stay on your credit report for seven years, but their effect on your score fades over time. If you missed a payment recently, focus on making every payment on time going forward and give your score at least three to six months to recover before applying.

If you closed a credit card and your utilization ratio jumped, you can offset some of the damage by paying down balances on your remaining cards. Getting your overall utilization below 30% will help, and below 10% is even better. The score improvement from lower utilization can show up within one to two billing cycles. If your debt-to-income ratio is above 43%, you have two options: pay down existing debt before applying or increase your income.

Document large deposits. For gift money, get a signed gift letter stating that it is a gift and not a loan. For other large deposits, such as a sale of property, a tax refund, or a bonus, keep records. Lenders typically want to see two months of clean bank statements. If you recently changed jobs, most lenders want to see at least one pay stub. You may need to wait until you can show two years of income history if you move from a salaried position to freelance or commission-based work. If multiple issues are stacking up, it may be worth delaying the purchase by six to twelve months. A rejected application or a significantly higher interest rate can cost you far more in the long run.

5 Ways a Financial Advisor Can Help You Prepare for a Mortgage

A financial advisor can look at your full financial picture and help you get into the strongest position possible before you apply. Here are five ways they can help.

1. Review Your Debt-to-Income Ratio and Build a Paydown Plan

An advisor can calculate your current debt-to-income ratio and identify which debts to prioritize paying off before you apply. Not all debt reductions have the same impact on your ratio, so targeting the right accounts matters.

Example: A client with a 46% debt-to-income ratio wants to buy a home within the next year. The advisor identifies that paying off a $4,500 credit card balance and a $3,200 personal loan would bring the ratio below 40%, putting the client in a much stronger position with lenders. The advisor builds a 10-month paydown plan using money the client was putting into a nonessential savings goal.

2. Help You Decide How Much House You Can Actually Afford

An advisor can run the numbers beyond what a mortgage calculator shows, factoring in property taxes, insurance, maintenance, your other financial goals and how the monthly payment fits into your full budget.

Example: A couple qualifies for a $450,000 mortgage based on their income. The advisor reviews their full financial picture, including childcare costs, retirement contributions and emergency fund balance, and recommends capping the purchase at $375,000 so they do not stretch their monthly budget to the point where one unexpected expense creates a problem.

3. Coordinate the Timing of Your Application Around Your Financial Situation

An advisor can help you figure out the right time to apply based on where your credit score stands, when a job change will look stable enough to a lender and how long you need to build up your savings.

Example: A client recently started a new job with a higher salary. The advisor recommends waiting four months before applying so the client has enough pay stubs to document the new income and enough time for a recent credit card payoff to reflect in an improved score.

4. Structure Your Down Payment and Savings Strategy

An advisor can help you figure out how much to put down, where to pull the funds from and how much to keep in reserve after closing. Taking too much from savings for the down payment can leave you vulnerable to unexpected costs in the first year of homeownership.

Example: A client has $80,000 in savings and is planning to put 20% down on a $350,000 home. The advisor points out that after the $70,000 down payment and estimated $12,000 in closing costs, the client would have almost nothing left in reserves. The advisor recommends putting 15% down instead, accepting a slightly higher monthly payment with private mortgage insurance, and keeping a $25,000 cash cushion for emergencies and move-in costs.

5. Help You Avoid Costly Mistakes During the Underwriting Process

Once you have applied, an advisor can remind you what not to do while your loan is being processed. Many buyers do not realize that lenders pull credit again before closing, and any new debt, large purchase or unusual account activity during underwriting can delay or derail the loan.

Example: A client under contract on a home asks their advisor whether it is safe to finance new furniture before closing. The advisor explains that opening a new credit account during underwriting could trigger a second credit pull and raise a red flag with the lender. The client waits until after closing to make the purchase.

Bottom Line

If you can’t buy a house without getting a mortgage, it’s in your best interest to avoid any moves that could prevent you from qualifying for one. The main thing is to not do – or fail to do – anything that might raise a red flag for an underwriter seeking to determine whether you are a worthwhile risk.

Tips on Getting a Mortgage

A financial advisor can help you prepare for a mortgage application. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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