This Simple Mistake Could Cost You Your Mortgage Approval

by Christy Bieber | Updated July 19, 2021 - First published on April 14, 2021

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An African /American couple looks at each other worriedly. They sit in front of financial documents and a computer.

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It's a common mistake that anyone could make.

A mortgage is a huge financial obligation. And it's almost assuredly going to be the biggest loan you take out over the course of your life.

When you're ready to buy a home, you'll want to make sure you can qualify for a loan at the best rate you can possibly get.

Unfortunately, many people unknowingly make a financial mistake that could cost them their chance to get a home loan -- or could lead to paying a higher interest rate than necessary. That mistake? Taking on new debt.

Taking on new debt could affect your ability to get a mortgage

Taking on any new debt before applying for a mortgage is a big mistake.

See, lenders consider a number of factors when considering your loan application. They look at your credit score, and they consider your debt relative to your income. Both could be adversely affected if you take on a new financial obligation shortly before you apply to borrow for a home.

When you take on new debt, this affects the average age of your credit. This is a key component that factors into your credit score. Since you'll shorten the average length of time your accounts have been open, your score could suffer. That happens because lenders prefer to see you've been responsible with borrowing over a long period of time.

Taking on new debt also means a hard credit check goes on your credit history. Too many inquiries suggest to a lender that you're getting careless with taking on financial obligations and possibly biting off more than you can chew. Your credit score could suffer because of it. Plus, a new debt could make a potential mortgage lender concerned about your ability to make those new payments on top of a new mortgage payment.

Your new loan payment will also affect your debt-to-income ratio, which is determined by dividing the total monthly debt payments by your gross monthly income. This ratio could make or break mortgage loan approval.

Many lenders want your debt-to-income ratio to be around 36%, including your new home loan payments. If you've borrowed shortly before getting a mortgage and have a new monthly payment to make, then your ratio will rise and could lead to a loan denial.

The last thing you want is to have your homeownership dreams derailed because you applied for a car loan, a credit card, or a personal loan to purchase furniture shortly before you got a mortgage.

To make sure that doesn't happen, try to put off any other borrowing until after you've closed on your home loan. That means you don't want to borrow in the year or so right before you're going to buy a home. And you definitely don't want to take on new obligations after you've been pre-approved for a mortgage but before you close.

It may seem like a hassle to avoid other credit if you feel you need it. But you'll probably be paying your mortgage for decades. So it's worth a little aggravation to make sure you get the best loan possible at the most competitive rate.

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