5 Money Mistakes That Can Get Your Mortgage Denied
Applying for a mortgage is one of the most significant financial steps many people take in their lives. The journey to homeownership can be exciting, but it’s essential to navigate it carefully. A misstep in your financial habits can jeopardize your mortgage approval. Here are five common money mistakes that can get your mortgage denied.
- Making Large Purchases on Credit
When you’re in the process of applying for a mortgage, making large purchases on credit can be a big mistake. Buying a new car, expensive furniture, or even splurging on a vacation with your credit card can increase your debt-to-income (DTI) ratio. Lenders closely scrutinize your DTI to ensure you can manage additional debt. A high DTI ratio indicates that you might struggle to make your mortgage payments, leading to a potential denial.
Tip: Delay large purchases until after your mortgage has been approved and finalized.
- Changing Jobs or Careers
Stability is key when applying for a mortgage. Lenders prefer borrowers who have a stable employment history, ideally in the same field. Changing jobs, especially to a different industry, can be seen as a risk by lenders. Even if your new job pays more, the lack of a stable work history can raise red flags.
Tip: If possible, avoid changing jobs during the mortgage application process. If a job change is unavoidable, provide your lender with as much information as possible to prove your new position is stable and secure.
- Ignoring Your Credit Score
Your credit score is one of the most critical factors in securing a mortgage. A low credit score can lead to higher interest rates or even denial of your application. Many people make the mistake of not checking their credit report before applying for a mortgage. Errors on your report, high credit card balances, and late payments can all negatively impact your score.
Tip: Check your credit report at least six months before you plan to apply for a mortgage. This will give you time to address any errors and improve your credit score.
- Opening New Credit Accounts
While it might be tempting to open a new credit card or take out a loan before buying a home, this can be detrimental to your mortgage application. Opening new credit accounts can result in hard inquiries on your credit report, which can temporarily lower your credit score. Additionally, new credit lines can increase your DTI ratio.
Tip: Avoid opening new credit accounts or making major financial changes until after your mortgage has been approved and closed.
- Not Having Enough Savings
Lenders not only look at your current financial status but also at your financial reserves. They want to see that you have enough savings to cover your down payment, closing costs, and several months of mortgage payments. Not having sufficient savings can be a red flag for lenders, indicating that you might struggle to cover unexpected expenses or financial emergencies.
Tip: Build up your savings before applying for a mortgage. Aim to have at least three to six months’ worth of living expenses in an emergency fund, in addition to your down payment and closing costs.
Navigating the mortgage application process requires careful financial planning and discipline. By avoiding these common money mistakes, you can improve your chances of securing a mortgage and moving into your dream home. Remember, the key is to demonstrate financial stability and responsibility to your lender. Plan ahead, manage your finances wisely, and you’ll be well on your way to homeownership.
