Archive for August 10th, 2007|Daily archive page

Buyers: What to avoid once you’re pre-approved for a mortgage

Here’s an account of interactions I had with three different first-time buyers this summer. The advice I gave these clients may be useful to other buyers as well.

Clients A: Happy couple with newborn

Shortly after they were pre-approved for their mortgage, I got an e-mail asking if they should buy a car (apparently the back seat in one of their vehicles wasn’t set up to accommodate the new baby seat they needed).

I responded with a resounding NO.

Some first-time buyers don’t realize that getting a pre-approval doesn’t guarantee they’ll be approved for the actual loan. “Pre-approval” simply means that the lender has taken a snapshot of credit, income, debt, and assets at that particular point in time. If this “snapshot” changes significantly between the pre-approval and when the buyer(s) attempt to close on the loan (i.e. house is found, offer is accepted, and application is finalized), the lender may decide to loan less than originally quoted (or may even withdraw the loan offer completely).

If my clients had purchased a car, their debt would’ve increased significantly though their incomes remained the same. This would very likely result in the lender reducing the amount they were willing to finance – if my clients had been pre-approved for $350k they might actually only have received $300-325k. (As debt increases and income remains the same, lender risk also increases because the borrower is now responsible for paying out more each month from the same pool of income. To mitigate their risk, lenders will lend less.)

Client B: Happy single guy

We found the condo he wanted and got his offer accepted. He had already scoped out where his big new LCD high-definition TV would go. Luckily he waited until after closing to buy it, for the reasons I gave above. One might think a lender wouldn’t notice a couple thousand dollars recently added to a credit card when finalizing a loan. This may be – but with mortgage credit standards tightening by the day, is it worth risking it? Wait until after the home is actually yours before you start decorating it.

Clients C: Happy newlyweds

These clients were tempted to do something many do when trying to clean up their credit: payoff and close credit cards. So why did I stop them?

Paying off balances (or even just reducing them below 1/2 of the total credit available) is great. Closing the cards is not. If cards are closed, your payment history will eventually fall off your credit report. When applying for a loan, you want as much of your credit history to show as possible.

To really clean up your credit, you need to understand how it works. Your score is influenced by two things: frequency of use and balance carried. If you use credit frequently and carry a balance greater than 50% of your available credit, your score will suffer. If you use credit frequently and carry a balance less than 50% of your available credit, your score will improve (especially if you pay off this balance every month).