From the time an applicant walks through the door to the actual closing, banks have become very cautious about the entire home mortgage loan process. Even when an applicant has a good down payment and good credit, issues arising at the last minute can result in the loan being denied.
Here are four tips to help applicants ensure they don't encounter last minute problems right before their mortgage closing:
1. Avoid major purchases and large cash withdrawals. Even after the mortgage loan has been approved, high-dollar purchases should be avoided until after closing. Many applicants are under the assumption that an approval is the end of the deal, but this isn't the case. Lenders view major purchases as more debt for the applicant and more risk to themselves. They've been known to pull mortgages right out from under applicants that make major purchases, such as that of a car, during the mortgage process. Since banks assess an applicant's cash reserves during the loan approval, paying for such purchases with cash is even out of the question.
2. Don't forget about last-minute credit checks. The new rules contained in Fannie Mae's loan quality initiative mean that lenders are likely going to do another credit check shortly before the mortgage closing date. This is when the lender will discover the major purchases mentioned in tip number one. It's also the point that they will see if the applicant has been delinquent in paying their credit card, existing mortgage, and other debts since first applying for the mortgage loan. Such delinquencies can cause a dip in the applicant's credit score. In fact, even just applying for a new credit card between the approval and closing dates can possibly result in a credit score dip. Don't jeopardize the standing of the loan by not being prepared for a second credit check.
3. Postpone big career or job changes. Lenders carefully consider an applicant's job stability and salary during the loan approval process. If the equation changes somehow, such as when the applicant changes jobs, then the mortgage loan may be either pulled completely or delayed until the applicant can demonstrate that the new job is stable and provides the financial resources necessary to pay the mortgage. Lenders especially frown upon an applicant that changes industries during the mortgage loan process. If possible, applicants should postpone making any changes to their employment status until after they have the keys to their new home in hand.
4. Expect unexpected costs. Closing-cost surprises are commonplace, which is why it can be a big mistake to put all of your reserved money toward the mortgage down payment. Closing costs can change at any time and can amount to as much as 3% of what the applicant is paying for their new house. In other words, someone buying a $100,000 home could potentially pay as much as $3,000 in closing costs. The last thing an applicant wants is to make it all the way to the closing cost portion and find that they lost the home because they haven't set enough money aside to cover mortgage rate points or closing fees.
A Consumer's Guide to Mortgage Settlement Costs, a publication by The Federal Reserve Board, is an excellent guide to help consumers understand how to buy and finance a home.