You have applied for a mortgage and have been pre-approved! Great, nothing can go wrong, right? Well, not exactly. One major factor is working against you, and that is time! A lot can happen from when you are pre-approved until the closing date.
The biggest reason is that your lender will likely do another credit check before you take possession of your home. Most lenders want the credit bureau on file to be dated within 30 days of closing as part of their pre-funding check to ensure you have not taken on any additional debt since the initial pre-approval.
If you applied for your mortgage before shopping for a home (recommended), and the closing date for your new purchase is 30+ days, that lender will do another credit check. The consequences of any changes to your financial position could mean your mortgage may need to be altered. At the very least, it may cause a delay while the lender makes the necessary updates and requalifies the mortgage application. The result may be the lender asking for a larger down payment or declining the mortgage.
To avoid any headaches or surprises, follow these simple tips:
- Don’t apply for new credit of any kind,
- Don’t pay off collections or charge-offs,
- Don’t close any credit card accounts or lines of credit,
- Don’t max out or over-charge your credit card accounts,
- Don’t consolidate your debt onto 1 or 2 credit cards,
- Don’t make any job/income changes,
- Don’t co-sign for any new credit of any kind, and
- Refrain from transferring large amounts of cash between accounts.
- Do consider a credit-monitoring service,
- Do stay current on existing accounts,
- Do continue to use your credit as usual,
- Do have a conversation about credit with any mortgage co-applicants,
- Do keep a paper trail of significant deposits and bank statements,
- Do keep a copy of your recent pay stub on hand in case needed,
- Do have your down payment ready 2+ weeks before the closing date,
- Do call your mortgage broker if you have any questions.
- Don’t apply for new credit of any kind.
#1 Don’t apply for new credit of any kind
New credit applications are the most common pitfall for new homeowners, especially those purchasing newly built homes who need appliances and furniture.
Whenever you have your credit pulled by a potential creditor or lender, you lose points from your credit score immediately. Depending on your credit report’s accounts and details, you could lose anywhere from 2-50 points.
Many of us have recieved “You have been pre-approved” credit card invitations in the mail. If you start an application, it will work against you. As mentioned, zero down/no payments on appliances and furniture are among the most common. But the credit checks outside the spotlight come from cell phone carriers and utility companies providing TV, electricity, hydro etc.
Suppose a new credit account appears on your report before closing. In that case, the lender will incorporate the debt, for example, your new car payment, into the application and this new payment will lower the maximum mortgage amount.
This change may or may not affect your application if you have lots of room between the maximum mortgage you qualify for and the value of the home you are buying. However, back to those purchasing a newly built home, it could be a massive deal if there is little room, especially since most new home construction goes over budget.
If you consider adding new debt during home buying, talk to your mortgage broker first.
#2 Don’t pay off collections or charge-offs
Paying off collections may seem beneficial, but it can negatively affect your credit score due to the date of the last activity becoming more recent. When deciding when to pay a collection, you should always defer to your mortgage broker’s advice as they will help ensure that it doesn’t influence the mortgage process.
Remember, the bank may require you to pay it off before granting you a loan, so timing is critical.
#3 Don’t close any credit card accounts or lines of credit
It’s important to note that closing a credit card, line of credit or store account with a zero balance can cause your utilization ratio to go up. This ratio is calculated by dividing the amount you owe by the available amount. Your credit score is an excellent indicator for banks and lenders.
For example, closing two accounts with zero balances could cause this ratio to jump to 20%. Furthermore, factors like the length of your credit history also take a slightly longer time and complexity to calculate in line with bank standards. Keeping your cards open, on the other hand, provides excellent evidence of stability, which will benefit your overall score.
#4 Don’t max out or over-charge your credit card accounts
It is essential to keep your credit card balances low. It’s best to keep them below 30% of their available limit. If you need to pay down balances on multiple cards, do this evenly across all your cards or prioritize bringing down the card with the highest utilization ratio first. Remember that some payments may need 3-5 business days to process.
If you reach or over-charge your credit card, you could reduce your score by 50-100 points.
#5 Don’t consolidate your debt onto 1 or 2 credit cards
Consolidating all of your debt onto one card may sound like a great idea, but it can be detrimental to your credit score if you appear maxed out on that card. If you’re looking for ways to save money on interest rates, it’s best to wait until after closing your cards. That way, your utilization rate will remain low and won’t affect your credit score.
#6 Don’t make any job/income changes
#7 Don’t co-sign for any new credit of any kind
It’s best to avoid any significant changes during the mortgage process. This includes adding new accounts, co-signing on loans, and changing your name or address with the bureaus. So be mindful of making too many changes during this period for greater success in obtaining your mortgage.
#8 Don’t transfer large amounts of cash between accounts
#9 Do consider a credit-monitoring service
If you join a credit monitoring program, you can check your reports weekly or daily, depending on the provider.
Read more about Canada’s two Credit Reporting Bureaux.
This way, if something does show up on your reports that has caused your score to go down, you’ll know it immediately, and you can take care of the problem before closing. They are also a great way to detect fraudulent transactions and identity theft.
Using this service to pull/check your reports, you don’t get dinged at all, and there are no negative consequences for these types of programs.
#10 Do stay current on existing accounts
It’s essential to keep your credit in good standing. Late payments can have a significant financial impact, costing anywhere from 30-75 points. Additionally, CMHC requires that no past-due payments appear on your credit report within the previous 12 months, so stay current.
#11 Do continue to use your credit as normal
If you are pre-approved, continue to use your credit as you normally would. Use your card, make your payments, and keep your balance low.
#12 Do have a conversation about credit with any mortgage co-applicants
#13 Do keep a paper trail of significant deposits and bank statements
#14 Do keep a copy of your recent pay stub on hand in case needed
#15 Do have your down payment ready 2+ weeks before the closing date
#16 Do call your mortgage broker if you have any questions
When in doubt, call your Mortgage Broker!
We have reviewed many credit reports and can give you straightforward advice on almost any credit situation.