What does it mean to get pre-approved for a mortgage?
Getting pre-approved for a mortgage is a key step in the homebuying process. It involves a lender evaluating your financial background, including your income, assets, debt-to-income ratio, and credit score, to assess how much you can borrow. The preapproval indicates you have passed an initial vetting and are eligible for a loan up to a certain amount. This assessment also determines thetypes of home loansyou qualify for. For those wondering, “How do I get preapproved for a home loan,” the process typically starts with submitting financial documents to a lender, who then assesses your creditworthiness.
The impact of financial decisions post pre-approval
Once you’ve been pre-approved for a home loan, it’s easy to assume that the hard part of themortgage processis over. However, your financial decisions following preapproval can either make or break your chances of closing on your dream home. Engaging in behaviors that negatively impact your financial standing can lead lenders to reconsider your loan eligibility. Therefore, maintaining the financial status that helped you get pre-approved for a mortgage is paramount.
5 key things to avoid after you’re pre-approved for home loan
Although it might seem counterintuitive, receiving a mortgage preapproval is easy. Then comes the hard part — maintaining financial discipline and stability between your loan preapproval and the final closing. To avoid jeopardizing your mortgage, here is what not to do after a preapproval for a mortgage.
1. Taking on new debt
After the preapproval for a mortgage, your financial landscape should remain as stable as possible. Acquiring new debt, such as financing a car, opening new credit card accounts, or making substantial purchases on existing credit, can significantly impact your debt-to-income (DTI) ratio. Lenders use the ratio to assess your capacity to cover monthly payments and repay debts. An increased DTI ratio can signal to lenders that you’re at higher risk of default. It can trigger a reevaluation of your loan terms or the rescission of your preapproval. Before taking on any new debt, consider its implications for your futuremortgage termsand your ability to afford your new home.
2. Changing jobs
Job stability is a cornerstone of financial reliability in the eyes of lenders. A career move after getting pre-approved for a mortgage—especially to a lower-paying role or a new industry—might jeopardize your loan approval. Lenders look for consistent and reliable income streams when approving loans since it indicates an ability to keep up with mortgage payments. If a job change is unavoidable, ensure it is a strategic move that either maintains or increases your income level. Additionally, be prepared to provide your lender with ample documentation to justify the change.
3. Large, unexplained deposits or withdrawals
After receivingmortgage preapprovalfor a home loan, keep your banking activity consistent and transparent. Lenders often review your financial statements again before final loan approval. Large, unexplained deposits can suggest undisclosed debt or financial gifts that could affect your DTI ratio or financial stability. Similarly, significant withdrawals may raise concerns about your savings and whether you’re depleting funds needed for down payments or closing costs. If you have legitimate large transactions, keep detailed records and documentation to explain the source and purpose of these funds to your lender.
4. Neglecting your credit score
Your credit score plays a pivotal role in securing mortgage approval, affecting not only your qualification but also the interest rates and conditions of your loan. Additionally, the process of credit scoring is essential for assessing the credit risk of a borrower and making decisions about mortgage approvals (Avery, Bostic, Calem, & Canner, 1996). Actions that could decrease your score, such as missing payments, late payments, applying for new credit, or utilizing a high percentage of your available credit, should be avoided.
After you get pre-approved for a mortgage, maintain or improve your score by making all payments on time, keeping balances low, and refraining from any behavior that could result in hard inquiries on your credit report. A stable or improved credit score reinforces your creditworthiness and may lead to favorable loan conditions.
5. Co-signing on loans
Co-signing a loan for someone else may seem like a helpful gesture, but it increases your financial obligations. It can also significantly impact your DTI ratio. From a lender’s perspective, co-signing is equivalent to taking on new debt, as you are legally liable for the amount borrowed if the primary borrower fails to make payments. This added liability can make lenders question your ability to handle additional monthly payments, potentially affecting your mortgage approval. If you’re considering co-signing a loan, it’s essential to understand the risks and discuss the implications with your lender.
How to safeguard your pre-approval status
Maintaining your pre-approval status after obtaining it is crucial in ensuring that your journey toward homeownership progresses smoothly. The period between your preapproval and the final loan approval is critical, with financial discipline and smart decision-making at the forefront of safeguarding your mortgage eligibility. Here’s how you can protect your pre-approved status:
Maintain financial stability:Avoid taking on new debts or making large purchases that could affect your debt-to-income ratio. Keep your existing credit in good standing by making payments on time and managing your balances.
Steady employment:Aim to stay in your current job or within the same industry, as lenders look for consistent income when finalizing loans. If a job change is unavoidable, ensure it’s a positive move, either lateral or with higher pay, and be prepared to explain the change to your lender.
Monitor your credit:Regularly go through your credit report for any inaccuracies or unexpected changes. Avoid activities that could lead to hard inquiries on your credit report, such as applying for new credit cards or loans.
Transparent financial activities:Document and explain any large deposits or withdrawals in your bank accounts to avoid red flags from lenders. Keep a paper trail of transactions to demonstrate the origins of funds, particularly for significant deposits.
Open communication with your lender:Inform your lender of any significant financial changes or decisions that may impact your loan eligibility. Regular updates and transparency can help mitigate potential issues before they affect your loan approval.
Ent Credit Union’s support through the mortgage process
Ent Credit Union supports our members throughout the entire mortgage process. From guiding you through pre-approval for a home loan to helping you understand what not to do after a preapproval for a mortgage. Ourmortgage lenders in Coloradowill do what’s best for you, including advising whether to lock in interest rates. Tools like ourmortgage loan calculatorwill help you determine your monthly payment after preapproval. We are here to provide the support and advice you need to secure your home loan successfully.
FAQs
What does getting pre-approved for a mortgage mean?
It means a lender has confirmed your eligibility for a loan up to a certain amount based on an initial evaluation of your financial condition.
How long does my mortgage preapproval last?
Mortgage preapprovals typically last 60 to 90 days, during which you should actively search for and secure a property.
Can I still be denied a loan after receiving preapproval?
Yes, changes to your financial situation after you get pre-approved for a mortgage can lead to loan denial.
What financial changes should I avoid after getting pre-approved?
Avoid new debt, job changes, unexplained bank account changes, actions that could lower your credit score, like missed or late payments, and co-signing loans.
How can Ent Credit Union help me stay on track after preapproval?
Ent Credit Union offers personalized advice and support to navigate the post pre-approval process. We keep you updated, recommend whether to lock in rates, and offer recommendations ensuring you maintain loan eligibility.
Resources
Avery, R., Bostic, R., Calem, P., & Canner, G. (1996). Credit risk, credit scoring, and the performance of home mortgages. Federal Reserve Bulletin, 82, 621-648. https://doi.org/10.17016/BULLETIN.1996.82-7.
