There are many ways to mortgage your home, and it is important that you find a lender who will work with you. If not, then these mistakes could land you in trouble. Here’s how to avoid them if the situation does arise.

The “how to get a mortgage with bad credit” is a topic that many struggle with. There are 7 big mistakes that people make when trying to obtain a mortgage. These mistakes can lead to bigger problems down the road.

7 big mortgage mistakes (and how to avoid them)

Even though mortgage interest rates have lately risen, they remain historically low. I opted to refinance our mortgage when interest rates were much lower. I contacted the mortgage broker with whom I’ve worked for over 20 years. We’d completed at least a dozen mortgages at that period, between acquisitions and refinances. Each was straightforward, fast, and painless.

This time is different.

Because of COVID, lenders’ criteria for approving mortgage applications have gone from strict to ludicrous, particularly if you’re self-employed like me. As a consequence, The underwriting process took 14 months, four applications, and over 400 papers!

I chatted with my mortgage man after we finally completed the transaction and asked him what makes it difficult for a lender to accept a mortgage.

Here’s what he had to say.

AaronAmat / iStock contributed to this image.

Why make things difficult when you can make them impossible with little effort?

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The two primary challenges we encountered this time were straightforward. The first was that, as previously said, both my wife and I are self-employed. We’ve been self-employed for over a decade, and it’s been fantastic for our income and feeling of independence. Self-employment, on the other hand, scares lenders, particularly during a pandemic.

The second issue is that we’ve been too effective in lowering our taxes to the extent that it’s permissible (e.g., deducting depreciation, business miles, training programs, qualified business income, etc.). Reduced tax obligation leads in increased debt-to-income ratios because lenders look at the ratio between your new mortgage payments (and total debt payments) and your income. That irritates lenders.

These variables make getting a mortgage authorized tough. To avoid them, though, you must either earn less money (as an employee) or pay greater taxes. Throwing the baby out with the bathwater is a bad decision in both cases.

Since no one should do that, here are seven things to avoid that will move your mortgage from tough to (almost) impossible to accept, as well as what to do instead to make it simpler to approve.

DepositPhotos.com provided the image.

1. Before or during the application process, do not change or quit your job.

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Lenders want to see a strong revenue history. More importantly, they want to have the “warm and fuzzy” sense that your track record will continue until the loan is paid off.

It may seem viscerally good to decide you’ve had it with your boss and telling them to shove it, but doing so before your mortgage funds (a few days after closing) is a certain way to put yourself in financial trouble.

Instead, try this.

Stay in your existing work as long as feasible, at least until your mortgage is financed. If that’s not possible, attempt to get a better-paying job as soon as possible (obvious!).

Three Spots / iStock contributed to this image.

2. Keep your most recent tax returns and W2s.

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While a lender may (and will) request your tax transcripts from the IRS, this is just to confirm the information in the copies of your tax returns that you send to the lender.

Those tax transcripts, on the other hand, do not disclose the names and addresses of your previous jobs. This might be a huge issue if you’ve changed jobs in the last 24 months.

Instead, try this.

This is a no-brainer to avoid. Simply retain your tax returns and W2s for at least the last couple of years (the IRS recommends keeping them for at least three years, but that’s another issue).

franckreporter contributed this image.

3. Avoid taking up (or co-signing on) new debt.

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When your overall debt payment is too large a percentage of your income, lenders feel nervous, so taking on extra debt while applying for a mortgage makes it much more difficult to get accepted.

This isn’t just about your own debt. If your child wants to purchase a new automobile but doesn’t have enough credit to qualify for a low-interest loan, he may ask you to cosign his loan. Leaving aside the danger to your money (and relationship) if he stops paying, it raises the possibility that you won’t be able to make timely mortgage payments from the lender’s standpoint.

Instead, try this.

To prevent this issue, don’t obtain a new credit card or line of credit, and don’t co-sign one while applying for a mortgage.

It’s also a good idea to avoid any harsh credit checks during this time, such as those that occur when you attempt to expand an existing credit line or credit card limit.

DepositPhotos.com provided the image.

4. Don’t pay off all of your debts (at least not the ones you wouldn’t have otherwise).

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This is counterintuitive and may go against advise from family or friends (who aren’t in the sector and don’t understand how things operate these days).

Given how important your debt-to-income ratio is to lenders, and how a high “utilization ratio” (the ratio of your total amount to your credit limit) affects your credit score, paying your bills (including credit card balances) in full should be a positive thing. It is, but it isn’t the only factor that lenders consider.

They also want to see enough reserves, which would allow you to continue paying payments if you lost your job for a period of time. If you withdraw a substantial quantity of money from your accounts to pay off bills, credit cards, and loans in full, you risk depleting your reserves to the point where the lender will refuse to accept your loan.

Instead, try this.

Consult your potential lender before deciding which, if any, debts to pay off in full. They’ll be able to run a credit score simulator in-house and recommend which loans and invoices you should pay off in full to lower your debt-to-income ratio and raise your credit score without depleting your savings.

isockphoto/travelinglight

5. Make little deposits into your accounts.

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This is also rather counterintuitive. What issue may there be with having more money in the bank (greater reserves)? Those deposits aren’t a concern in and of themselves. If they occur within 60 days of when you originally applied for your mortgage, the lender must keep track of where they originated from. They are concerned that big sums of money will be borrowed. If this is the case, your debt and monthly payments will rise.

These figures (including your wage or business income) should raise red flags if they are larger than your regular income and/or in round numbers (such as $3,000 or $5,000). The lender has no way of knowing whether the money originated from cash in a safe or beneath your mattress, so they can’t include it into your loan qualification.

Instead, try this.

Before making such substantial installments, speak with your lender once again. They’ll inform you what paperwork is required to resolve the issue. Go ahead and deposit the money if you can supply it. If not, it’s probably better to wait until your debt is paid off.

Deposit Photos provided the image.

6. Avoid making (too many) account transfers

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Every large amount going into or out of your accounts must be recorded, which is related to the above. If you transfer $10,000 from your person checking account to your joint checking account, then from your joint checking account to your company checking account, you’ll have four line items to track: out of individual checking, into joint, out of joint, and into business checking.

Worse, if the funds come from an account you don’t own, you’ll need to prove your link with the account’s owner. It may be your parents or a sibling, in which case you’ll need a gift receipt (if it’s a loan, see “Taking on (or Co-Signing on) New Debt” above).

If it’s not a documented relative, persuading the lender that it’s a gift that you don’t have to repay will be considerably more difficult.

Instead, try this.

Keep your financial activities as basic as feasible till the loan money to assist your potential lender.

PeopleImages provided this image.

7. Don’t expect to get money back at closing because of seller concessions.

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This one only applies to new purchase loans, not refinances. It’s rare in today’s harsh seller’s market. Sellers may sometimes provide concessions to sweeten the transaction in more balanced markets, particularly in buyer’s markets. Closing fees and/or prepaid expenditures (e.g., a year’s worth of homeowners insurance, interest, etc.) may be covered with such allowances, but you will not get a check to deposit in your bank account.

As a result, don’t establish an under-the-table arrangement with the seller to increase the cost you agree to pay by raising the loan amount and loan-to-value ratio, with the expectation of receiving the difference at closing.

Instead, try this.

It’s preferable to simply say no if a seller gives you allowances in exchange for a higher selling price. If there is a need to accept, keep such concessions to a minimum to avoid a negative closing cost.

DepositPhotos.com provided the image.

In conclusion

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Mortgage approval is more difficult than ever, especially after COVID. Avoid the seven faults listed above if you want to make it easy for your selected lender to assist you. Doing any of these (let alone several) is a terrific way to turn something that is already tough into something that is practically impossible.

However, if you follow the “Instead, try this.” advice above, your lender will thank you, not least of which by getting your loan approved more quickly and easily (assuming you meet the loan-to-value and payments-to-income ratios, the home appraises, etc.).

This item was syndicated by MediaFeed.org and first published on WealthTender.com.

Tirachard/istockphoto contributed this image.

MediaFeed has more.

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Deposit Photos provided the image.

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