How to Stay Qualified for a Home Loan
Purchasing a home is an exciting milestone, but it’s crucial to understand the risks involved during the loan approval process. Even after securing a pre-qualification or loan approval, changes in your financial or credit situation can lead to denial—sometimes right before closing.
Here’s what you need to know to protect your pre-qualification status and avoid unpleasant surprises.
Why Home Loans Can Fall Through
A loan pre-qualification or approval isn’t guaranteed until the lender funds the loan. Here are some common reasons loans can fall apart:
Changes in Credit Score
- Example: Jan Little lost her condo after an unpaid $87 phone bill appeared on her credit report, dropping her credit score by 50 points.
- Lesson: Monitor your credit report regularly to avoid surprises. Use tools like Annual Credit Report to check your credit history.
Inaccurate Loan Applications
- Example: The Sanchez family was denied because Mr. Sanchez overstated how long he had been self-employed.
- Lesson: Ensure your loan application is accurate and provide documents promptly.
Employment Changes
- Example: Billie Baker quit her job after signing loan papers, leading to loan denial.
- Lesson: Avoid employment changes until the loan funds are disbursed. Learn more about employment verification from Fannie Mae’s guidelines.
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12 Tips for Keeping Your Qualification Status:
1. Monitor Your Credit Report
Stay proactive with credit monitoring services to catch any issues early. Platforms like Experian can alert you to changes in your credit report.
2. Stick to One Lender
Avoid applying for multiple loans. While shopping for rates, remember that multiple hard inquiries can lower your credit score. Learn more about this from the Consumer Financial Protection Bureau.
3. Disclose Past Credit Issues
If you have negative credit history, discuss it with your lender to avoid last-minute surprises.
4. Keep Income Documentation
Save recent pay stubs and tax returns, as lenders will need them to verify your financial standing.
5. Provide Bankruptcy Documentation
If applicable, keep discharge papers and a list of included accounts ready, as lenders may request them.
6. Pay Bills On Time
Payment history impacts up to 40% of your credit score. Set up auto-pay or reminders to avoid late payments.
7. Avoid NSF Transactions
Overdrafts and non-sufficient funds (NSF) on your bank statements can hurt your loan approval chances. Learn how to manage bank accounts effectively from FDIC’s guide.
8. Maintain Employment Stability
Lenders look for steady employment without significant gaps. Avoid job changes while in the loan process.
9. Pay Rent With Checks
Use checks for rent payments to provide a clear record of on-time payments, as these may be requested during underwriting.
10. Avoid New Debt
Don’t finance large purchases, such as furniture or cars, until after your loan closes. Adding new credit accounts increases your debt-to-income ratio.
11. Save Aggressively
Lenders often require proof of cash reserves. Build up your savings to show financial stability.
12. Communicate With Your Lender
Provide all requested documents promptly and maintain open communication to address issues early.
What Happens If a Loan Is Denied?
If your loan is denied, you’re not alone. Take these steps to recover:
- Speak With Your Lender: Understand the reason for denial and whether it can be resolved.
- Work With a Housing Counselor: Contact a HUD-approved counselor for personalized assistance.
- Address Credit Issues: Dispute errors on your report through the Federal Trade Commission’s (FTC) guide.
Final Thoughts
Purchasing a home requires careful financial planning and vigilance throughout the loan process. By monitoring your credit, avoiding major financial changes, and communicating with your lender, you can secure your pre-qualification status and make your dream of homeownership a reality.
For help, speak with our certified housing counselors. Schedule your appointment today or call 800-431-8157 for free, confidential counseling.
