All too often, individuals find themselves in a state of shock when they learn that they have been turned down for a home loan despite their belief that their finances are in good shape. Oftentimes, this type of unexpected denial is the result of a few common mistakes that people make in the month before they begin applying for home loans. You can learn more about some of these common mistakes below so that you can avoid making them yourself.
#1: Making Large Purchases
Mortgage lenders want to know that you have the financial resources to keep up with your loan payments even if there are temporary changes in your current source of income. This is done by looking into your available savings and lines of credit. If you make a large purchase before applying for a home loan, you will be decreasing your available resources and potentially raising your debt-to-income ratio. Consequently, any large purchases that you intend to make should be postponed until after you have closed on your new home.
#2: Closing Long-Standing Accounts
One of the biggest factors that lenders consider when reviewing your home loan application is your creditworthiness. When looking at your credit report, lenders are looking at more than just your overall credit score. They also look at the length of your credit history, the different types of credit accounts you have had, and your debt-to-income ratio. The reason the length of your credit history is important is because lenders want to know that you can be financially responsible for extended periods. Closing a long-standing account will shorten the length of your credit history and can therefore negatively impact your ability to secure a home loan.
#3: Opening New Lines Of Credit
Even if you do not make any actual purchases, opening a new line of credit can hurt your chances of getting approved for a home loan. This is because just as closing a long-standing account can shorten the average length of your credit history, so can opening a new account. Furthermore, each time you apply for credit, a hard inquiry is made against your credit report. Having multiple hard inquiries can cause your credit score to drop. Since most mortgage lenders require you to meet a credit score requirement, anything you do that can negatively impact your score will ultimately reduce your chances of being approved for a home loan. Even if you are still approved for a loan, a lower credit score could mean being offered a loan with a higher interest rate. This is yet another reason to never open a new line of credit before applying for home loans.
For more information about home loans, contact a local lender.