There are many mistakes you can make when applying for a mortgage, Today, Paula Christine and Jon are joined by Aelene Vanderveen of Cross Country Mortgage. Aelene will walk us through some common pitfalls and how to avoid them.
A mortgage calculation looks at three main categories - income, assets, credit, and collateral. The first three are largely within your control. Aelene talks about not making any large purchases or gaining a large asset while going through the home-buying process. As the saying goes, "You can't borrow money to borrow money." She explains what this means.
Don't open any new lines of credit - even those department store cards that offer discounts for small purchases. That can affect your application, as can any credit pull. You may be excited to furnish your new home, but it's best to wait. Aelene also explains why it maynot be a good idea to pay off medical debt during this period. Seems counterintuitive. The bottom line, talk to your lender before making any financial moves.
We also spend some time on credit scores, what goes into it, and why your credit history and debt-to-credit ratio is crucial. In fact, during the tumult of 2008, some borrowers' credit scores dropped, simply because credit card companies lowered their limits!
What if you're self-employed, like Paula and Jon? Aileen says you'll likely need your last two years of tax returns, plus a rough P&L statement for the current year.
What if you're applying with someone else - such as a spouse or even a friend/roommate? Your lender will take the middle of the three credit scores for each applicant, and the lower one goes into the file. This is important to think about if you can get approved on one person's income vs. two.
At the end of the day, the most important thing is to overcommunicate with your lender. If you aren't sure about something, ask!
You can find Aelene at Cross Country Mortgage at 734-679-7000, or email her: aelene.vanderveen@ccm.com
To reach Paula, you can email her at paula@paulachristine.com or visit her website: https://paulachristine.com/
Paula Christine: Hi. Welcome to Beyond the Paycheck. I'm Paula Christine. Last week on my Facebook page popped up this post from one of my girlfriends who's a mortgage broker, about the common mistakes people make before they apply for their mortgage. I've asked my friend Aelene Vanderveen from CrossCountry Mortgage on today to talk about some of the mistakes that people make when they're applying for a mortgage. Welcome.
Aelene Vanderveen: Hello, Paula. Thank you for having me.
Paula: We were talking earlier about my daughter who, when she was applying for her mortgage, and her boyfriend deposited money into her bank account. Anyway, it caused her to have to send in news statements, and I don't know, a bunch of just stuff that she had to jump through. I learned a lot from watching her go through that process, but I'm sure you have a ton to share with us.
Aelene: There are a lot of things that can go sideways, I guess we'll call it, don't make these mistakes when applying for a mortgage.
Paula: Oh, perfect. There's our title, Jon.
Aelene: I like it. Okay.
Jon: Jonny and done.
Paula: Did you write that down?
Jon: On it.
Paula: Okay. Sorry about that. Go ahead.
Aelene: Rally there are four things that we as a lender look at. Four different categories, I guess. We look at income, assets, credit, and collateral. Three of those things the borrowers have a direct impact on, and all of them are equally important as they go through the process. An answer to your question that you had talked about with your daughter, that obviously would be under the credit category.
When we are looking at assets, we have to be able to document and verify where the funds are coming from. Depending on the kind of loan, we have very specific guidelines of what we would consider a large deposit. If it's a conventional or a conforming loan, anything over 50% of the borrower's monthly income is considered a large deposit. We have to be able to document, let us know where those funds came from.
For example, if somebody made $5,000 a month on a conforming loan, a deposit over $2,500 has to be documented. Then on a government loan it's 25%. That same $5,000, a deposit over $1,250 would have to be documented and explained.
Paula: Why is that? Are they afraid somebody's giving them money?
Aelene: Yes, so you can't borrow money to borrow money. You can get a gift from an acceptable gift source, so a family member. I mean, there's a lot of different sources that are acceptable, but for our time today, let's just say a family member. We have to document the gift as well because they can't go out and say, pull money off of a credit card or borrow money from brother Joe to buy a house. You can't borrow money to borrow money. We have to be able to document and source where the funds came from.
It can be they sold their car, and we can document that by showing a transfer of title, but it can't just be a large deposit that you throw into your account and hope that we won't notice it, because we will. We notice everything.
Paula: I just always understand that. Say you want to apply for a mortgage, it's good while you're going through the process to not buy anything. Like you hear people say, "I'm going to be moving into my home and closing the mortgage, and so I'm going to go out and spend $3,000 on my credit card for furniture." That's actually a big no-no too, correct?
Aelene: Correct. In terms of credit, like credit issues, don't make any major purchases. That exact thing that you're talking about, don't go buy furniture, don't go buy appliances, wait until after you close. Don't go apply for new credit. Same thing like, "Oh, it's 0% interest and I'm going to buy this new furniture." Don't apply for credit. Don't have your credit pulled. We have alerts that will let us know throughout the process. If you have your credit pulled, it gives us an alert. It could be that you didn't even do anything. I have lots of clients that have opened a department store credit card because they got 10% off their purchase that day.
I mean, they might have bought a blanket, no big deal but the fact that they had their credit pulled, it gives us an alert, and now we have to go back and kind of document that in fact, they did not open any new credit. The reason for that is I've had it on the flip side too, where they did go out and make major purchase. They bought a new car and maybe now they don't qualify. It's really important that you don't make any major purchases, don't apply for any new credit of any kind. Don't have your credit pulled at all.
Paula: What about a soft credit pool? We learned about that a couple of weeks ago.
Aelene: Yes, it will still show. My advice is to just hold off until after the process is done. It might not cause anything other than just a headache where you have to document that, hey, I still qualify, but it really could take it to the next level and you don't qualify for the house anymore. You lose your house or if it's a refinance, you can't close. Just hold off until after the process. Really, from start to finish, from the time that you find your house to the time you close, you're talking 30 to 45 days. Just wait. Just don't do that.
Paula: I know, but we all get excited.
Aelene: I know it's super exciting, but even more exciting when you actually have a house to make those purchases for. Hopefully your lender is telling you that upfront, but we all know this. It's a nerve-wracking time. It's an emotional time. Buying a house is very emotional, so you get excited and sometimes you don't always hear what is being explained to you. People forget even if they have been told. Hopefully, you're working with a lender that can help walk you through everything and then if something does go sideways, they'll help manage it. Again, best case is just not to do that.
There's a couple of other things that seem like they would be a no-brainer, but super important. Don't miss any payments. I've had clients that missed car payments during the process and really affects their credit scores, which could then affect them actually getting approved or could affect their interest rate. Be very diligent in making your payments and stay on top of that stuff.
Paula: That would seem like a no-brainer.
Aelene: But you'd be surprised. Again, people just get nervous and maybe just miss things or forget things, so I would just say be extra diligent during that time. This seems a little counterintuitive, but don't close any accounts. You might have credit cards that you've had for a really long time and you don't really use them and you think, "Oh, I'm just going to clean that up a little bit and close the accounts," but don't do that because that also can affect your credit score negatively. Because a long credit history is helpful in your credit scores.
Have conversations with your lender. Don't close any accounts whether or not you're using them or not. Also seems counterintuitive, if you do maybe have some medical collections or things like that, do not pay those off. Do not make any payments on those. Talk to your lender first because again, that can adversely affect your credit.
Paula: How would that affect your credit?
Aelene: Because a lot of collection accounts, they might be old or stale. There's no history on it. Let's just say that it's been sitting there for two years and now you make a payment on it or you pay it off, now the credit bureau is going to-- even though it's showing now that it's paid, it's more current and it's going to bring your credit scores down.
Paula: Wow. You would think the opposite.
Aelene: There are times that it would be necessary to pay off a collection account for closing, but what we would then do is get documentation and pay it off at closing. I wouldn't want you to do that ahead of time. A lot of this is just to have these conversations with the lender as well with your lender. Just don't go off and do it. Have conversations before you would take that step and do it on your own.
Jon: I'm finding this conversation very informative because my wife and I are thinking about moving into another house in the next year or so. I'm kind of distilling it down. The two takeaways I have so far is everything in your finances is under a microscope and if there's anything that you think is a gray area, talk to your mortgage person.
Paula: Don't do it.
Jon: Not just don't do it, but just talk to your mortgage person and say, "Okay, is this or is this not the right thing to do?" Because you want to have an expert walk you through this whole process.
Aelene: Yes, 100%.
Paula: I agree with you, Jon. I'm just thinking because I'm looking to buy a home in the first quarter of next year and I'm thinking about all the things that I'm going to have to remember not to do when I'm going through this process. I want to go back to one thing that I've never quite understood.
Aelene: Sure.
Paula: You can have a ton of credit cards with no balance and yet that's good and have like a credit limit that's high on them and that's a good thing. When I would think that that would be a bad thing.
Aelene: It boils down to credit utilization. Let's say that you have a younger person, maybe that is just starting out. They have a credit card with a high limit that's available to them for $1,000 and they have a $500 balance on it. Or say they have a $700 balance on it. Their utilization is 70% of credit that they have available to them, they aren't using in a revolving debt manner.
Then you have another person that has $20,000 available to them in terms of the high limits on their cards and they only use $5,000. Their balances all equal $5,000. Well, their credit utilization is a much lower percentage therefore the credit bureaus look at that as a better risk, a better class scenario and they will get a higher score because of it. It's the credit utilization, especially when it has to do with revolving debt. The lower your utilization is, the better but you still want to use them. That's still going to help increase your credit scores. That's one thing.
Then the other thing is if you have a long account. I had credit cards that I've had for 20 years. Those are good long-standing accounts where somebody that's just starting out, they might have only had credit available to them for 12 months. They don't have a long enough history and not that they can't get a mortgage, they can, it's just a different scenario where somebody that has had long-standing accounts, which is why I say even if you don't use it, don't close it because those accounts that have been there for a long time help your credit.
In terms of applying for a mortgage, we are looking at your credit history. It's not the lender really, it's the credit bureaus. It's their engines that assign the credit scores and that's one of the things that they use to base it on.
Jon: I have an American Express card that I've had since 2001. It is my oldest line of credit. I don't use that card for anything but I keep it open because I've had that account with them for over 20 years.
Aelene: That bodes well for your credit scores.
Paula: I think my longest credit card is probably close to 30 years.
Aelene: Keep it. It's helping your scores.
Paula: I'm shocked at my credit limit. I'm just amazed as me how high your credit limit can be.
Aelene: You know what was interesting back several years ago when things were really difficult in the housing market, really in everything back 2008, '09, '10 where you had credit companies actually lowering credit limits, credit cards were saying your limit used to be $10,000, now it's $8,000, now it's $5,000 whenever it is. People that were doing no purchasing, no buying, their balances didn't change but their credit scores would go down because now the credit utilization looked to be like you were maxing out your credit scenarios where really banks were just lowering the limits.
Jon: Wow.
Paula: Oh, in 2008?
Aelene: Yes. Another thing that's really super important, again because of the categories that we look at being the income assets credit and then the fourth one collateral, which that just has to do with the lender and the house itself, but income, don't quit your job.
Paula: Oh, that would make sense.
Aelene: But you would be surprised. Don't change jobs, don't change positions, don't change the way you're paid, don't change how many hours you're working. Obviously don't quit your job. That's a no-brainer.
Paula: What about the position, if you got a promotion?
Aelene: I'm not saying that you shouldn't ultimately do it. I guess some of these I would say just have that conversation with your lender. You change positions, you got a promotion, that's fantastic, no problem. There's going to be no problems with that. Even switching jobs if you're in the same field and your income has at least stayed the same or gone up again, no problem likely unless you're on probation or something like that. Don't change the way you're paid. I've had borrowers that are either hourly or salary, now they go to a consultant position and now they're considered self-employed.
Jon: Oh, wow.
Aelene: Totally not a good scenario in terms of lending because we have very specific guidelines for self-employed borrowers. You need a two-year history. You have to have filed tax returns so that we can see really truly what you make because we qualify you based on the income that you submit to the IRS.
Paula: I'm self-employed, so is Jon and we're both actually thinking of buying a house. Is it an average of a certain number of years, because my income fluctuates?
Aelene: Yes.
Paula: Let's say I was applying right now, when they look at 2022 and 2021, 2020, how far back did they look?
Aelene: We're going to look at your most current two years of your 1040s that have been filed. They need to be the most current two years. 2021, 2022 and then a year-to-date P&L. It does not have to be an audited P&L. You can just do a P&L as long as I have the two years of tax returns and then we're going to do an average of the income over that period of time.
Paula: Okay. Because I was wondering about that.
Aelene: Generally speaking, it's going to be a two-year and a year to date. Two years of tax returns, general rule of thumb need to be filed. Sometimes we can do it with one year and then whatever the year-to-date income is.
Paula: Now, is there anything else that a self-employed person needs to worry about or make sure that they're on top of?
Aelene: What A lot of times is confusing for a self-employed borrower is they're like, "But Aelene, I brought in my receipts were $400,000 this year," but they've written everything off all the way down to where their actual income that they're reporting to the IRS is $40,000 and that's what they're paying taxes on and that's what the lender's going to use under a normal conforming scenario. Whatever you are paying taxes on, meaning the income, your bottom line income, that's what we as a lender can use.
Jon: That's a really good point, Aelene, because I'm thinking about that where a lot of small business owners know every deduction and every trick in the book so that they're avoiding paying taxes but if you're--
Paula: Not us. We do everything legitimately.
Jon: Dude, I'm not saying even anything illegal, Paula.
Paula: I know. I write off as much as I can.
Jon: You write off as much as you can so that your taxable income is lower but it's important to know that because the lower your taxable income, that's the number they're going to look at when they're evaluating you for a mortgage. That's a really important point.
Aelene: You need to have your tax returns analyzed obviously by a lender that knows how to analyze self-employed returns, number one. That's where it would start. There are things that even though you take the right off for it, we can add it back in as income. Just super important to start the process sooner than later. Don't say, "Hey, I'm going to start looking for a house next month, so that's when I'm going to talk to my lender." I would say it's even more important for somebody in that self-employed arena to do their due diligence sooner rather than later.
Give yourself a couple of months so that you can have your questions answered and get on the right page and the right path that you need to do in order to be able to accomplish what you want to accomplish in terms of your buying power.
Paula: In thinking of my situation, I would likely need to meet with a lender prior to even looking for a house because I might find the house of my dreams which I know I can afford but may not qualify for based on deductions and different things like that. Correct?
Aelene: Correct. Everybody needs to meet with their lender before they get out there and start looking. Self-employed even more so, even a little bit longer of a ramp, give yourself a little bit extra time but as a general rule of thumb, we're in a market that if you're not at least pre-approved and maybe fully underwritten, you're not going to compete in this market. You need to have all your ducks in a row. Everybody needs to do that ahead of time but a self-employed borrower, even more so.
Paula: Changing the subject a little bit, let's say you have a husband and wife, a newly couple getting married, one has a horrible credit history and the other one has a decent credit history. Just the person with the decent credit history apply for their mortgage and not even deal with the person that has the--
Aelene: If you can qualify for what you want off of the strong credit borrower's income, then I would say yes, you're going to have a better scenario in terms of rate with stronger credit. Both people make no mistake. Both people can go on the purchase agreement and be on the mortgage, so they both have interest in the property when only one person is obligated on the note. It doesn't have to be, "Oh, if I'm not on the purchase agreement, I don't have any claim to this property." That's not accurate.
Paula: Oh, I thought that's how it works. If the person that had the mortgage, they're liable for the loan. You can actually have both people on the title.
Aelene: On the title, in the mortgage, with only one person obligated on the note.
Paula: Wow. Would I want to be the only person obligated though?
Aelene: It depends on their situation and sometimes you need income from both of them and therefore I have to use both. If I need income from both, I have to look at credit for both.
Paula: If I have an 800 credit score and my partner has a 600 credit score, then they're going to affect the rate because of their credit scores though.
Aelene: Yes. When we pull credit, we get scores from all three bureaus and then we assign the credit scorer. It's the mid-score, just the middle score of the three bureaus for each person, then the lower of those two scores is the score for the file.
Paula: Say that again.
Aelene: Let's say I'm pulling credit for Paula and partner. Paula has three credit scores, 700, 750 and 750. Then your partner has a 650, 680, and a 690, your partner's middle score is 680, Paula's middle score is a 750. The 680 score is the score for the file.
Paula: Oh, yuck. Because you're going to have a higher interest rate.
Aelene: Yes. If you can qualify on your income alone, then it makes more sense depending on the situation. Everybody's situation is different. It's a little bit easier to say if it's a married couple but in that scenario, it would be better for the mortgage for Paula just to be on the loan by herself. I know I'm talking about you and the third person.
Paula: That's fine.
Aelene: If that's just a partner and you'd have no other financial ties outside of that house, but you're buying the house based on the two of you making payments on that together, then that's something of course that you should have those conversations with that partner prior to putting yourself on the line for that.
Paula: It also sounds like you should meet with an attorney.
Aelene: Yes.
Paula: To protect yourself.
Aelene: 100%. We're seeing that more and more right now where unmarried, whether they're a couple friends, we're seeing it more and more right now where we never used to see that. It was mostly a couple to some extent that were buying a house. We're seeing that now more than I ever have in all the time I've been doing this.
Paula: Relationships have just changed so much. Getting married is not the norm anymore. Life is changing. I just find this conversation to be fascinating. I have learned a lot. I know now that I need to get better prepared for when I want to start looking for a house. I guess I go back to what Jon said. You decide you want to buy a house, you get pre-approved, and then you really make no financial decisions, purchase nothing, don't make large deposits, don't sell anything, for 45 days. If you have to, then you call your lender.
Aelene: Yes, communication is key. You just need to communicate. Don't leave information out. That's really important too like when your lender asks you for information, whether it's just questions or documentation, truly we're not asking just because we want you to clean out your junk drawer. We need the documents that we're asking for. Timeliness, get them as quickly as possible. Just keep the lines of communication open. It's really, really important on both sides for the lender as well as the borrower.
Paula: If someone would like to reach out to you, how would they get a hold of you?
Aelene: Best number for me is 734-679-7000.
Paula: Can they email you?
Aelene: It's aelene.vanderveen@ccm.com, CrossCountry Mortgage.com.
Paula: Okay. We'll have that in the show notes for everybody. If you'd like to get a hold of me, you could reach me at paula@paulachristine.com, or you can check out my website at paulachristine.com. I really appreciate you spending time with us today, Aelene. I've learned so much.
Aelene: Thank you for having me. It was wonderful. Lovely talking to you.
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