Many people wanting to buy one of the new-build homes in St. George, Utah, or any other communities in Washington County fail to close on time by miscalculating the mortgage procedure.
If you have never applied for a home loan before, the first thing you need to know is that timing is everything. There is little room for arbitrary decisions; eagle-eyed lenders can find the weaknesses in your credentials.
The preparation for your mortgage application should be a couple of years in the making. However, the most crucial period is the last 60 days before you make your first inquiry. Why? Below are the reasons why this window is critical to the success of your application.
Seasoning Your Funds
Since the 2008 financial crisis, mortgage lenders have learned their lesson. They no longer loan to borrowers with no credible financial capacity to manage repayment. Financial institutions have different risk appetites, but they all have strict asset and cash reserve requirements.
No lender will accept your funds at face value. They will demand paper trails to make sure they come from legitimate sources, and separate your actual savings from gifts and other allowable assets.
Considering that the money in your bank account should suffice to cover your down payment, closing costs, and two monthly mortgage payments in reserves, you should make every penny count.
An average mortgage lender will scrutinize at least the last 60 days of your bank account’s history. During this period, there should be no suspicious activity, or else you will have a lot of explaining to do.
A good rule of thumb is to pool all of your monetary assets two months before you start shopping around for mortgage rates. Minimize your withdrawals and debits to demonstrate that you can get by without touching most of your finances.
Do not attempt to take out a loan to beef up your cash reserves. Lenders will know, for it will trigger a hard inquiry and the opening of a new credit account. Both items will likely appear on your credit reports, so avoid trying to outsmart your prospective mortgage lender.
Keeping Your Credit Intact
Another reason why you should not acquire any form of debt 60 days before you apply for a mortgage is to preserve your FICO scores. Any significant change to your credit report can knock some points off and send you one credit-score tier down.
Nevertheless, you should continue using your credit cards. As long as you keep their balances no greater than 30% of your credit limits and you cover at least the minimum payments before the due dates, shopping with your plastic should not negatively affect your creditworthiness.
Shopping for Mortgage Rates
Pre-approval involves an extensive background check, which will cause your FICO scores to dip since it is a new credit request. A hard inquiry is executed every time you get pre-approved, so doing it far too frequently would hurt your credit, in theory.
Fortunately, FICO allows deduplication, a concept that counts multiple inquiries as one to mitigate its impact on credit. FICO scoring models will usually let you deduplicate your credit inquiries but only over 45 days. That is why you should not start shopping around if you are not ready to close in about two months.
The mortgage process is not without uncertainty, but you have to be deliberate with your actions. With calculated moves, you can put yourself in the best position to take out an adequate loan with favorable terms.
