Steadily since the Great Recession, mortgage lenders have tightened their guidelines. Today, it takes more income, more assets and a better credit rating to get approved for a mortgage loan than it did before the housing bust. If you have determined that you are prepared for the true cost of home-ownership and determined you need a mortgage loan, you'll want to do what you can to get a prompt approval.
According to recent Housing Mortgage Disclosure Data, about 9% of mortgage applications are denied nationally, and denial rates can vary by city and state.
There can be a variety of reasons why a mortgage loan application is turned down -- at least initially. Delays often result when borrowers make avoidable mistakes.
The 5 most common mortgage mistakes
Many mortgage applicants make the same mistakes which cause their applications to be denied. Below are some things you should never do while your home loan is "in-process."
1. Become self-employed
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 may not get to use your income for mortgage qualification purposes at all. It is possible to get a mortgage when you are self-employed, but the process may be more complicated than for those with traditional employment.
The self-employment net is wider than you might think. "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.
While your loan is in-process, do not quit your job, do not start a new company, and do not switch from a salaried position to a commissioned one. Each could delay or defeat your approval.
2. 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, especially first-time homebuyers.
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.
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 may appear as incorrect information on loan application and count against you.
3. 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 can damage your FICO score and 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 could be a tiny sum as compared to the cost of losing your dream home.
4. Miss bill payments
Paying your bills on time helps 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 could damage your credit score or result in collection.
5. List your home for sale (when refinancing)
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 may 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.
No mistake on mortgage application: get pre-approved
Your mortgage pre-approval is finite. It expires as mortgage rates change. The amount for which you can qualify today may 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 can lower your maximum purchase price by more than 10 percent. That is a significant reduction in purchase price and a figure that buyers should ignore at their own peril.
