If you're thinking about refinancing your mortgage, now is a great time to take advantage of super low interest rates. But until the loan has been finalized and you've signed off on all the documents, resist the urge to go out and celebrate your upcoming savings with that new big screen TV.
Why, you ask? Your lender has eagle eyes when it comes to watching your credit. Once you are in the mortgage process, maintaining the status quo can keep the process running smoothly.
"It's not over until it's over - meaning until your loan is closed. So don't be a moving target," says Dave Rouse, president of Wisconsin Mortgage Bankers Association.
Want to learn about more refinancing no-no's? Read on to find out what not to do while refinancing so you can get the best loan possible.
No-No #1: Opening Up New Lines of Credit
The credit card advertisements proclaiming "0 percent APR for the next year" can be tempting.
But no matter what kind of great deal you might be offered, don't open up new credit lines until your refinance has been finalized. Otherwise, it could ruin your chances for a loan.
"Don't open or increase any liabilities, including credit cards, during the loan process," says Herb Levin, owner of 1st Eagle Mortgage, Inc. in Northfield, Ill. "This could have a major impact on your credit score. Even transferring balances to a zero-interest credit card could cause havoc for your loan."
Why? Because opening new accounts can lower your credit score in the short-term, notes the website of the Fair Isaac Corporation, which invented the FICO credit risk score that lenders use. And as you probably already know, a lower credit score can mean higher interest rates for you.
No-No #2: Making Major Purchases
That shiny red convertible has been your dream forever. And now that you'll be saving hundreds of dollars per month after refinancing, you figure you can splurge.
Not so fast. "Buying a new car, furniture, appliances, or anything else may impact your ability to qualify," says Rouse. "Your total debt-to-income ratio is considered, and the acceptable limit has become slightly more conservative in recent years."
Just what is the "acceptable limit"? It varies from lender to lender. For example, the Federal Housing Administration (FHA), "allows you to use 29 percent of your income towards housing costs and 41 percent towards housing expenses and other long-term debt," its website notes. Your "other long-term debt" may include student loans, car loans, and credit cards, to name a few things.
So, if you make a major purchase and put it on a credit card or take out a personal loan for it, your debt-to-income ratio will go up.
Why is this important for you? Rouse explains that this ratio shows lenders whether or not you have a good balance of debt and money coming in. So any major purchase you make will factor into your debt-to-income ratio, which can result in higher interest rates or losing the loan altogether.
No-No #3: Changing Jobs Before Your Loan is in the Clear
A competitor business has been after you for months to switch over to their company. What a confidence builder, not to mention the big boost in salary and benefits.
But you may want to think twice about signing that new employment contract before you've signed your new mortgage contract.
"Don't change jobs without inquiring about the impact this change could have on the approval of your mortgage loan," says Levin.
That's because income, when it comes to mortgage lending, is viewed through a scope of past, present and future.
"We assess whether the income is sufficient, dependable, and likely to continue," Rouse says. "Any significant and changing trend in income or changes in job status are areas of concern." The outcome and likelihood of loan approval may change for some.
And once you've closed the loan, you'll still want to hold off a bit before giving your two week's notice. That’s because even after the loan is clear for closing, all lenders verify employment within three days of the closing date, Levin says.
No-No #4: Making Large, Undocumented Deposits
Your aunt leaves you 100 shares of Coca Cola stock in her will. You figure you might as well sell it now and add the profits to your bank account while your lender is still sifting through your loan application.
Having a bigger savings account will impress the lenders, right? Maybe - but you'll also delay the loan process. Here's why: Everything that happens financially in your life while refinancing can hinder the process. If all of a sudden thousands of dollars appear magically in your savings account, red flags could rise for the lender, Levin says. All financial transactions have to be documented.
So if you want to deposit money into your savings or checking account, it's acceptable only if you have the necessary documentation. The paperwork must show where the money came from, such as a bonus check stub, a copy of a will, a stock market sale receipt, or whatever it is says that the money is legitimate, Levin says.
No-No #5: Overestimating Self-employment Income
Working for yourself is great. There are no bosses to boss you around, and you don't have to feel obligated to participate in water cooler gossip. But being self-employed sometimes means your income isn't as steady as those who get a regular paycheck. And that can be tricky when refinancing your mortgage.
But over-estimating or doctoring the truth about your income to get better loan terms can only make things worse, says Rouse.
"Everything must be documented and supported during the loan process," he says. That means that overstating income or generalizing will hurt you in the long run.
Your lender will use your taxable net income - the bottom line of what you bring home after all taxes and other expenses are paid. Rouse says that trying to use your gross income (income before expenses are subtracted) will be figured out by the professionals eventually and only make things worse for you.
What can you do to make your case shine in the best light to lenders?
Rouse suggests bringing all your tax returns, W2s and paystubs to your first meeting with a professional lender to help figure out exactly what you can afford in a loan. And remember that honesty is always the best policy - especially when it comes to your mortgage.