A missed credit-card payment two years before you want to buy a home? It can scuttle your chances to qualify for a mortgage. And that's just one example. Homebuyers have the opportunity to make plenty of mistakes before they even begin to shop for a mortgage lender. Some of these mistakes make it more difficult to qualify for a loan. Others make a mortgage more expensive.
If you need a mortgage to finance the purchase of your home - and most of us do - you need to avoid five key mistakes that new homebuyers too often make.
"Some financial missteps can be devastating whether six weeks before closing or six years before closing," said Chris Birk, education director with Veterans United Home Loans in Columbia, Missouri.
1 - That missed credit-card payment
You know that big financial blunders such as losing a home to foreclosure or declaring for bankruptcy can send your credit score plummeting by 150 points or more. You should know, too, that a foreclosure will stay on your credit report for seven years and a bankruptcy for as many as 10. But did you know that missed or late credit-card payments can be nearly as devastating?
Credit-card payments are reported as late if you make them more than 30 days past their due date. Birk said that once a payment is reported as late to the three credit bureaus, your credit score can fall by 60 to 110 points. That late payment will remain on your credit reports for seven years, sending a red flag to lenders who might not be so eager to loan mortgage dollars to you.
"Some lenders won't loan you money if you don't have a 12-month record of on-time payments," Birk said. "That missed credit-card payment 10 months ago could make it difficult for you to qualify for a mortgage."
2 - Missing the lock period
Here's a mistake that can make your mortgage more expensive. You've landed a great interest rate and you've paid extra to make sure that your lender locks that rate in place. That's good. But if you take too long to provide the necessary paperwork to your lender, your interest-rate lock might expire. Then your interest rate might rise, making your loan payments higher each month.
The lesson here? Gather your financial paperwork before you apply for your loan. Lenders will want to see copies of your two most recent paycheck stubs, bank account statements, W2 forms and tax returns as proof of your income. If you wait too long to start searching for this information, you might delay the loan process. If you do this, your locked interest rate might expire.
"Don't spend too much time congratulating yourself on that rate," said Megan Grueling, senior communications manager with Lending Tree in Charlotte, North Carolina. "Get moving on getting that new mortgage closed. Find out upfront exactly when your lock-in period ends so you don't make the mistake of missing it."
3 - Making a big purchase
If you're ready to apply for a mortgage, resist the impulse to buy that new car. Don't charge an entire bedroom set on your credit card. Such big purchases can throw your debt-to-income ratio out of whack.
Lenders want your total monthly debts - including your estimated new mortgage payment - to be no more than 43 percent of your gross monthly income. If you add new debt, such as a big bump in your credit-card bill or new auto-loan payments, you could push your debt-to-income ratio past this 43-percent market. When you do, lenders will hesitate to work with you.
"It seems like such a mortgage-lending cliche, but people do sometimes go out and buy tons of furniture right when they're applying for a mortgage loan," Birk said. "I realize they need to furnish their home. But lenders will check your spending during the lending process. If you add too much debt you can really damage your loan application."
4 - Changing jobs
Mortgage lenders like stability. This extends to your job. Lenders prefer that mortgage applicants be working at least two years at their current job or employer before they apply for a loan. The reason? Lenders think you're less likely to lose that job - and the monthly income that comes with it - then if you've just switched to a new position.
Even if you're offered a new job with better pay and perks, try to negotiate a start date that doesn't come until after your mortgage loan closes.
And certainly don't move from a salary our hourly position to one based on straight commission. Doing so could immediately derail your mortgage application, said Scarlett Tassone, vice president with Atlanta's PrivatePlus Mortgage.
"There could be a big increase in pay, but you are required to have two years of commission income at that new employer, effectively putting off homeownership for two years," Tassone said.
5 - Closing that unused credit card
You might think that closing a credit card that you no longer use, and has no balance, makes financial sense. But it can actually hurt you when you apply for a mortgage. That's because part of your three-digit credit score depends upon how much of your available credit you are using.
Say you have four credit cards each with a credit limit of $2,000 giving you a total amount of available credit of $8,000. Say you also have a total of $3,000 in credit-card debt. If you close a card that you no longer use, you are removing $2,000 worth of available credit. Credit-card debt of $3,000 on $6,000 worth of available credit looks worse to lenders than does the same amount of credit-card debt on $8,000 worth of available credit.
So don't necessarily close that credit card. You might be surprised at the negative impact it has on your credit score and your ability to earn a mortgage.