Note to all members of Congress up for reelection next month: If you’re about to submit a mortgage application for a purchase or a refinance or already have one pending — and don’t want it denied — don’t get voted out of office. That’s because lenders don’t like lending money to unemployed people, no matter how many assets you have or how high your FICO score is. This intense dislike applies not only to out-of-work politicians, but also jobless bakers and bankers.
If you’re unconvinced, look no farther for confirmation than former Fed Chairman Ben Bernanke and why his mortgage was denied recently. Although no reasons were publicly stated for his loan rejection, mortgage observers noted that Bernanke wasn’t working at the time. Even though he stepped down voluntarily, his non-working status could have certainly sabotaged his loan application.
So that your loan application doesn’t end up like Bernanke’s, don’t commit the following three big loan mistakes either before or during the application process:
1. Don’t quit, lose or change jobs.
A job signals consistency, continuity and predictability to a lender. What lenders don’t like are surprises. Once you leave that safe space and cross the line into unemployment, you’re deemed less reliable and stable.
So, if you have any thoughts about changing jobs, even for a better one, you better sit tight and bite the bullet until you’ve moved into your new home.
If you lose your job before you apply for a loan or lose your job during the loan application process, you will have to show your lender that your situation is extremely temporary. This strategy is at best a longshot, however, because many lenders will simply not excuse a layoff of any kind. Whatever you do, don’t try to hide your current job status from your lender. Concealment could be considered loan fraud.
If you are self-employed, realize upfront that there will be a greater burden on you to show your income stream than there will be on someone working for wages. Moreover, be prepared to document your job income not only by showing tax returns from the last two years, but also bank statements from the past 12 months.
2. Don’t make big credit card purchases.
Unless you can keep your balance under 50 percent of your limit, it’s almost never a good idea to put big purchases on your credit card — and when applying for a mortgage loan you should absolutely never do it.
Lenders closely follow debt-to-income (DTI) formulas, so if a new credit card charge or even a new credit card application upsets that delicate ratio, you will greatly diminish your chance of being approved for a loan.
Winning a loan approval is largely based on your lender’s belief in your ability to repay your loan. Ideally, your lender wants to see that you use credit sparingly and responsibly. To make a large purchase financed by a credit card not only signals a certain recklessness and volatility that lenders abhor, it will throw off your DTI ratios.
Lenders are trained to look for red flags. Untimely, unscheduled and impulsive large purchases, especially when you’re applying for a loan, certainly qualify as such and are likely to ruin your chances of obtaining a loan.
3. Don’t count retirement income as income if you only tap it sporadically.
You don’t get to count money stashed away in an IRA because lenders rarely count it. Even if you have a quarter of a million dollars in your retirement account and high FICOs, you can’t tell your lender you’ll randomly tap your account in retirement to help pay your mortgage. If you’re retired, your income from Social Security, pensions, rental income and other validated sources will have to be enough to qualify you for a mortgage.
Again, lenders don’t like “sporadic,” they like steady. For your IRA account to count as income, you would likely have to show verification of regular receipt of drawdown income for two months and verification that the payments will continue for three years.
In other words, even though you could have an excellent credit history and a respectable nest egg tucked away in your IRA or 401(k), you can’t simply tap those accounts, whenever you prefer, to make up for any mortgage shortfall.
Don’t beat up your lender for instituting this tight lending standard. Fannie Mae, which buys the mortgages that lenders make, insists that lenders look for “regular and continued receipt” of income from retirement funds and to assess whether “the income is expected to continue for at least three years.”
Lenders sometimes are able to expand their guidelines governing retirement accounts. Freddie Mac, another agency that buys loans from lenders, allow lenders to annuitize applicants’ retirement fund assets, converting untapped IRA and 401(k) wealth into “income” that helps them qualify for a mortgage.
Don’t think you’re a bad person because your loan was denied
Loan applications get denied all the time for all kinds of reasons. Your application could have been incomplete, the appraisal for the home you want to purchase might have come in too low, there could be a mistake on your credit report.
Whatever the reason, your lender will have tell you why your mortgage was denied. Under the Fair Credit Reporting Act (FCRA), if your loan is declined, lenders are required to provide clear reasons for rejecting your loan application.
That said, don’t make it easy for them. Don’t make any sudden or rash decisions regarding your job or credit and don’t expect to make any intermittent drawdowns of your retirement funds.
When applying for a home loan or refinance, remember to value consistency above all else.
Lastly, if you are up for reelection next month, good luck!