5 Mistakes That Can Cause Your Loan To Be Denied

The loan modification portion of the stimulus package will provide millions of people with the opportunity to obtain financing which will allow them to keep their homes. However, just applying for a special home loan program doesn’t necessarily mean you’ll be approved. Regardless of which types of loan programs you may be eligible for, it’s important to know what not to do before beginning the process of applying for a mortgage.

In order to give yourself the best chance at qualifying for a lower interest rate and more favorable loan terms, you’ll want to avoid making the following 5 most common blunders to significantly increase your chances of qualifying for a home loan:

1. Running up credit cards balances
Having a lot of debt increases your debt to income ratio. This is a key factor that lenders use to determine how much debt you can comfortably manage. Before you apply for a home loan, make sure that your credit card balances are low. Refrain from using your credit to make purchases if you need to acquire a home loan. If your credit card balances are already high, start paying down the balances and keep them low.

2. Financing major purchases before applying for a home loanCountless people inevitably ‘kill the deal’ by purchasing a car or taking out a big loan from a finance company or their credit union right before they apply for a home loan. Similar to running up credit card debt, this additional debt can make the difference between getting approved or denied. If at all possible, wait until after your home loan has funded before financing other purchases. Believe it or not, many lenders will run your credit again even after they have approved your loan to find out if you have applied for more credit. If you are purchasing a home, you will want to wait until the day that your loan has actually closed. If you are refinancing a primary residence, there is a 3-day rescission (cancellation) period, even after you have signed the loan papers before your loan has funded.

3. Waiting until the last minute to obtain financingMany homeowners with an adjustable rate mortgage start to inquire about refinancing only 2 to 3 months before their initial rate expires, but by then it’s often too late. Because the criteria to qualify for all types of mortgages have become more strict; if you have a loan with a high interest rate or payments that are scheduled to reset in the next 1-3 years, you’ll want to start getting prepared now. Many people who have had their homes foreclosed on or are now facing foreclosure could have qualified for a more stable and affordable loan program had they taken the time to get better prepared ahead of time.

4. Paying off old collections and charge offsMany people who have re-established their credit often have some old bad debt (2-5 years old) that still shows up on their credit report. In most cases, paying off an old bad debt is a bad idea. It causes the account to reset and become current which more adversely affects your credit score. For homeowners who obtained a subprime loan, you’ll want to learn how to effectively manage your credit well in advance of applying for a home loan to qualify for financing. If you’re looking to purchase a home in the future, start educating yourself about what is required to obtain financing at least a year before you need a loan.

5. Signing up with credit counseling agenciesMany debt management services advise people to do just the opposite of what they should do in order to qualify for home financing such as closing out accounts in good standing. But these actions often cause their clients credit scores to decline. Since having a higher credit score is very important, especially in today market, you want to make sure not to engage in practices that will bring your score down. Also many lenders don’t look favorably at borrowers who have signed up with these services. It says that you are having trouble managing your finances which is a red flag to lenders. If you’re tempted to use your credit cards, a better strategy would be to cut them up, and pay down your balances so that you don’t incur high monthly payments, but keep your accounts open.

Understanding the home financing process and how to manage your credit well before obtaining a mortgage will ensure you get the best and safest terms as well as avoid the common mistakes that can cause your loan to be denied.