Almost everyone who buys a home needs a home loan. If you’re looking for a new home and want to show lenders that you’re a safe bet, what should you do? Some answers are obvious. Others, not so much.
Basically, lenders want to know how much money you have, how much money you will earn, how much you owe, if your income is stable, and how likely you are to make the payments. They determine the answers to these questions in various ways.
Not finding a new job
Once you give them permission, lenders verify how much money you have and how much you owe by reviewing your bank accounts, credit card statements, recurring bills, and other documents. They also check your income, but they don’t stop there. They like to know how long you have worked in your field and how long you have worked with your current employer. If you have recently changed jobs, and especially if you have changed industries, you are at greater risk than someone who has been in the same job for years, even if your income is higher. New jobs don’t always work out and lenders don’t want to end up with the bag once the honeymoon period for the new job is over.
Don’t quit your job
If your loan was pre-approved on the basis of a two-income household, neither of you should leave your job before the escrow closes (even if you and your spouse have done the math and know that you can only make loan repayments on one of your two salaries). Many lenders verify employment more than once. If you were pre-approved months ago, the lender may call to confirm employment immediately before the escrow closes. No job? No loan.
Do not declare bankruptcy
I feel like it goes without saying, but don’t file for bankruptcy while you’re trying to get approved for a home loan. Similar to income verification, lenders often verify that no major financial changes have occurred prior to final closing.
Do not apply for new credit
Lenders want to be sure you’re not overstretched, which means they get nervous if you ask for extra credit while you’re trying to get approved for a home loan. Don’t go looking for a car loan, a new cell phone, or anything else that requires regular payments, even if you can afford it. This will lower your credit score, which is an indicator to measure your creditworthiness.
While many of the factors that determine your credit score are easy to understand, the specific algorithm for determining your FICO score (credit score) is a closely guarded secret. For no apparent reason, if your overall available credit stays the same but you change credit card companies, your credit score drops. So don’t choose this time to cancel your current credit card and choose a new one.
Don’t move money
If you’re lucky enough to have friends or family willing to provide financial support to help you buy your new home, ask them to wire the money directly into your escrow account (and if you plan to wire money, please read my previous article, Avoid Wire Fraud, so your money goes where it should). When you start transferring large sums of money between accounts, lenders get nervous.
I have kind of a crazy story about money transfer and balance fluctuation. Years ago I applied for a loan to refinance my home. It was approved, no problem, but at the last minute they did a credit check and discovered a significantly higher balance on my credit card. It was not unusual; the same fluctuation happened every month – put expenses on the card and pay them at the end of the month. However, by the time the lender contacted me to ask what had happened, their bank’s underwriting requirements had changed and I was no longer eligible for the loan. It’s really rare, but it shows that stability is essential when applying for a loan.
If you have any questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. To view previous articles, visit www.selzerrealty.com and click on “How’s the Market”.
Dick Selzer is a real estate broker who has been in the business for over 45 years.