Steadily since 2005, mortgage lenders have tightened their guidelines. Today, as compared to recent history, it takes more income, more assets and a better credit rating to get approved for a home loan.
That said, it is no wonder that one in four mortgage applications were denied in 2010, according to analysis conducted by the Wall Street Journal.
But banks cannot bear all the blame.
The 5 most-common mistakes that mortgage applicants make
As a loan officer, I've witnessed too many mortgage applicants make the same mistakes which always ensure their applications wind up being denied.
There are just some things you should never do while your home loan is "in-process." Here are the five most-common mistakes I see mortgage applicants make:
1. Do not go "self-employed" or quit your job
When you are a full-time, salaried employee, your lender considers you "safe." This is why you can get approved for a mortgage with just one day of W-2 job history. The lender knows your next paycheck is just around the corner and how much you will be paid.
For the self-employed, that guarantee is absent.
Lenders want to see consistency of income. Unless you have two years of history as a self-employed person, you will not get to use your income for mortgage qualification purposes at all.
Furthermore, the self-employment net is wider than you would think. It does not include just company owners. Self-employed includes business owners, persons owning more than 25 percent in an entity and W-2 employees whose salary is more than 25 percent bonus or commission.
So, while your loan is in-process, do not quit your job, do not start a new company, and most certainly, do not switch from a salaried position to a commissioned one. Each could ruin your approval.
2. Do not finance a new car
Just because you are buying a home with a garage does not mean you need to fill it (at least, not right away). Buying a car too soon is one of the most common mistakes that homebuyers make.
The problem is that most car loans carry monthly payments of between $300 and $1,000. Those are debts that did not exist at the time of your mortgage application. The new debt can push your debt-to-income ratio beyond the allowable limit and cause your loan to get turned down.
Also, be especially careful when your current car loan has 10 months remaining or fewer. For mortgage qualification purposes, debt like this is counted as $0; it is considered paid-in-full by lenders.
If you do a trade-in and then take out a new loan, the new payments will count against you.
3. Do not open new credit cards
When you are shopping for furniture and accoutrements, if you have not closed on your home, resist the ubiquitous call to "save 10 percent by opening up a store credit card today". With each credit application, you damage your FICO score and you add to your monthly debt liabilities.
These two items combine to threaten your mortgage approval. Sure, you may save 10 percent at the register, but that will be a tiny sum as compared to possibly losing your dream home.
4. Do not forget to pay your bills
Paying your bills on time will also help maintain your credit score while your loan is in-process. That includes student loans, tax bills, mortgage loans, credit cards--everything. Even if the bill is in dispute, make sure you pay it on time.
There will be plenty of time to argue with your creditors after your home has closed. Until then, do not do anything that will damage your credit score or result in collection.
5. Do not list your home for sale
If you are in the process of refinancing your home, do not list it for sale. Lenders do not approve home loans if the underlying collateral (i.e. the home) is "on the market."
In fact, only a few select banks will lend to you if your home was listed within the last three months.
After approval, you are welcome to sell. It is your home, after all.
Bonus tip: Get Pre-Approved Often
Here is a bonus tip: You need to know that your pre-approval is finite. It expires as mortgage rates change. The amount for which you can qualify for today will not be the same as what you can qualify for tomorrow.
This is because mortgage rates change all the time.
At today's mortgage rates, no matter your price point, a 1 percent increase in mortgage rates lowers your maximum purchase price by 10.75 percent. That is a huge reduction and a figure that buyers should ignore at their own peril.
Therefore, talk to your loan officer regularly. As mortgage rates change, so does your approval.
Good luck.
Dan Green (NMLS #227607) is a loan officer with Waterstone Mortgage in Cincinnati, Ohio, and the author of the nationally recognized mortgage blog, TheMortgageReports.com. Follow him on Twitter at @mortgagereports.
