Buying a home is an exciting experience, especially near the end when you’ve got all the elements lined up like neat dominoes, ready to fall in place at the closing table. But like a string of dominoes, a single misplaced tile breaks the chain, taking you back to the start to begin set-up anew.
The period between the time that your lender pre-approves your mortgage application and the closing date is the critical window. You’ve done the work, demonstrated your fiscal responsibility and saved up the funds. Your lender has looked at your finances, concluded that you’re a safe bet to repay the loan, and approved your application. It was a risk decision on their part, so you will want to focus on stability – the opposite of risk – to avoid any last-minute changes to your lender’s decision-making. Stable financials boils down to credit, debt and income:
Step cautiously to protect your Credit
You’ve carefully built and guarded your credit score, cleaned up reporting errors and established a strong, reliable payment history. Keep at it and try not to make any drastic changes to your credit picture. Continue to make your monthly payments without fail (it goes without saying but we can’t emphasize it enough) and avoid applying for new lines of credit.
The process of applying for new credit alone will have a short-term, negative impact on your credit score. A new line of credit could have a larger, and longer lasting one. You also do not want to close existing lines of credit at this time. The average age of your lines of credit is a factor in the credit score calculation. Close an account and it, along with the payment history associated, can fall out of the equation potentially changing your score.
It’s not the time to take on new Debt
Debt-to-Income ratio is one of the financial metrics that lenders focus on when making an underwriting decision. Taking on additional debt (or a decline in income) will shift that metric. Shift it too far and you may find that your lender’s willingness to approve your application has shifted as well.
Avoid making major purchases or taking on additional debt. Be particularly careful of in-store lines of credit. This isn’t the time to buy-now and pay-later, even if furnishings and appliances for your new home are particularly tempting. Go ahead and pick them out, just hold off on making the purchases. You should be similarly deliberate with the timing of a purchase or lease of a new car. Pull it forward or defer it until after closing if you can, and give your lender a heads up if you absolutely cannot.
Protect and preserve your Income
Your lender approved your application based on your income. They even went so far as to independently verify that information with your employer. Changing employers disrupts that income and makes lenders nervous. Even if the new opportunity is a step-up financially, it’s at the cost of continuity and may give a lender pause.
The guidance here is simple: Do not change jobs during this window if you can avoid it. Lenders want to see a two-year history with your current employer. Defer your start date until after the closing has been completed.
If you can’t avoid it, there are workarounds, but they involve additional documentation and risk on the lender’s part that may lead to delays and higher borrowing costs for you.
Stability is Key
Lending is about managing risk and the antidote for risk is stability. Specifically, stable patterns of financial behavior, credit and income.
The pre-approval is an agreement between parties based on an established set of facts. Any of the missteps above represent a material change to those facts and could cause your lender to reconsider their terms, or even their decision, altogether.