Qualifying for a mortgage is expected to be easier in 2015 thanks to more lenient lending standards but that doesn’t mean you can afford to be careless with your finances. MyBankTracker looks at some of the most common banking mistakes that could cause your application to be denied.
When you’re trying to buy a home, making yourself as attractive as possible to lenders is a must. Maintaining a solid credit score and a steady work history are good places to start but you also need to be mindful of how you handle your money.
At some point during the home-buying process, your lender will want to take a close look at your bank accounts to verify both your assets and expenses. To avoid creating unnecessary obstacles when you’re trying to qualify for a mortgage, you’ll want to steer clear of certain missteps that could cast your banking history in a negative light.
1. Shuffling money between accounts
One of the things that lenders look for when you apply for a mortgage is whether you have enough cash on hand to meet all of your financial obligations. The way they verify that is by looking at your bank statements. If you’re constantly moving money in and out of your accounts or transferring money from one bank to another, you’re just making more work for yourself when it’s time to document your balances.
Opening one or more new accounts to transfer funds is also a bad idea because it can have an adverse impact on your credit. Some banks will run a credit check before allowing you to open an account, which shows up as a hard inquiry on your report. Each inquiry can ding your score by a few points, which could impact your chances of eventually getting approved.
Tip: Consolidating your home buying funds into an online savings account is a good way to grow your money while you’re shopping around for a loan.
2. Letting an account go into overdraft
If you’re not keeping track of how much money is in your account or what payments are being sent out, it’s all too easy to end up in overdraft but it may not bode well for your mortgage application. It won’t show up on your credit but it could send the signal to lenders that you’re not capable of managing your money properly, which may cause them to think twice about granting you a home loan.
Opting into your bank’s overdraft protection can keep you from ending up in the red but it can be a double-edged sword. While some banks simply transfer money from your savings account to your checking automatically to cover a transaction when there are insufficient funds, others will establish a separate line of credit as your overdraft.
The bank will check your credit before granting an overdraft line, which will count as another inquiry against your score.
3. Failing to document cash transactions
Typically, lenders go back 30 days when reviewing your banking history, although some may ask to see 60 days’ worth of transactions. If you routinely make large cash deposits, you’ll need to be prepared to explain what those are for and provide appropriate records to back it up. For instance, if your parents give you $10,000 to put towards your down payment, you need to make it clear to the lender where the sudden windfall came from. Gifted funds also need to be documented properly for tax purposes to avoid raising a red flag with the IRS.
The other thing to be wary of is pulling out large sums of cash to cover your expenses. Part of the reason lenders want to see your bank statements is to verify what your monthly outflow is and it’s tougher to do that if you’re using cash for everything. Be sure to hang on to all of your receipts.
Tip: Simply switch to debit for a month or two so all the transactions are recorded in one spot.
4. Maxing out a line of credit
Your credit utilization ratio plays a role in determining your credit score so it’s best to keep it as low as possible when you’re trying to qualify for a mortgage. Simply put, this is the amount of debt you owe versus your total available credit. If you have an overdraft line of credit, personal loan or credit card issued through your bank, paying your balances down before you apply for a home loan is a wise move for a couple of reasons.
For one thing, it shows lenders that you’re not going to be spread too thin when it comes to making your mortgage payments. If you’re handing money over to multiple creditors each month, that could raise concerns about your ability to keep up with your house payments. The other advantage of keeping your balances low is that it can boost your credit score. Generally, the rule of thumb for maintaining a good score is to keep your credit utilization ratio at 30 percent or less.
Whether you’re able to qualify for a mortgage depends on a number of factors but taking steps to keep your bank accounts in good standing can definitely work to your advantage. Dodging the errors we’ve mentioned here can help you put your best foot forward financially.