There we were: 4:00 pm Friday in the Dave and Liz’s living room surrounded by moving boxes instead of closing the sale of their home to the new owners. The buyers had their loan commitment letter ten days ago and everyone was set for closing. Then two days ago the buyer’s lender revoked the loan commitment. No loan. No closing.
What happened? Earlier in the week the buyers bought new kitchen appliances using the store’s monthly installment payment plan. Since payments did not start until next month, they had no idea it could affect closing. Installment payments are a debt. The lender ran an updated credit check, discovered the new debt, and the buyer’s debt-to-income change resulted in the loan being revoked by the mortgage company.
Moral of the Story . . . A lot of work goes into getting your home loan approved. Follow the same guidelines after your loan is approved to ensure a happy closing day:
- Late Payments. Just one late payment affects your credit score. If there is an error on your bill, pay it and then work it out.
- New Credit. New credit cards, installment payments, loans or lines of credit affect your debt-to-income ratio.
- Closed Credit Cards. Don’t close any credit accounts. Credit score looks at your “credit utilization ratio” – the percent of available credit you’re currently using. Lenders want that number under about 30%. If you have three credit cards each with a $5,000 limit (total $15,000) and you owe $5,000 on your cards, you’re at 30% credit utilization. Closing a single card lowers your available credit to $10,000. Now that $5,000 in credit debt moves your credit utilization to 50% and can disqualify you for a loan.
- Consolidating Debt. It sounds like this might make sense. But there might be fees and interest rates that can change without warning, affecting your credit rating.
- Changing Banks. Banking history and status is important for your loan approval. Stay put for now.
- New Vehicles. Buying or leasing a different car affects your credit score.
- Switching Jobs. Sometimes this is out of your control. If that happens, talk with your lender immediately. Hold off opening your own business, moving to an independent contractor position or an income that relies on commissions.
- Large Purchases. Buying appliances, furniture, etc. for your new home is tempting. Don’t do it! Even paying cash depletes savings you have available for your down payment.
- Avoid Large Deposits (typically over $1,000), such as money gifts from family. To a loan underwriter, large deposits might mean borrowed money/new debt. If you are receiving extra income from any source, ask your lender first so you know what documentation you should have before depositing.
- Don’t Co-Sign Any Loan. This a debt obligation that can disqualify you for your own loan.