5 Things To Avoid Before Applying For A Mortgage

Of the millions who applied for a mortgage loan in 2023, close to 12% were turned down, according to the Federal Reserve Bank of New York. 

People are often rejected because of recent financial inconsistencies, says Jeff Avevelo, a financial wellness expert at the debt management firm Greenpath.

“If you’ve had any major changes, a lender will require some explanation,” Avevelo said. “It’s good practice not to rock the boat for six months or even a year leading up to a mortgage application.”

It’s not impossible to get a mortgage with some red flags, Avevelo added. “But consider all the pros and cons before making changes, because the lender will ask questions.” 

Below, CNBC Select looks at what to avoid if you’re getting ready to apply for a mortgage, as well as the moves you definitely want to make.

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A high credit score can significantly help your chances of getting a mortgage, Avevelo told CNBC Select, and a low one can make it harder. Your payment history accounts for 35% of your credit score, according to FICO, so paying bills on time and in full can prime your credit before you file a mortgage application.

The amount of debt you’re carrying is another 30% of your FICO score. If you use more credit than you can pay by the end of your billing cycle, not only will you get hit with costly interest payments but your score will drop. 

Your debt-to-income (DTI) ratio is all your monthly debt payments divided by your gross monthly income. 

FICO doesn’t track income, so your DTI doesn’t directly impact your credit score. But mortgage lenders use it to judge your ability to make on-time payments, Avevelo said, and a car loan or huge credit card bills can cause your DTI to spike. 

Lenders prefer a DTI of 36% or lower, indicating you have enough income left over to put into savings or investments.

Mortgage lenders request bank statements as part of the mortgage application process to ensure borrowers have a steady source of income. An atypically large deposit may suggest your balance doesn’t reflect your actual situation or that you’re receiving income from an illicit source, Avevelo said.

An unusually big withdrawal could make your lender worry that you’re not using all your available funds to prepare for homeownership. 

If you’ve recently made a large deposit or withdrawal, make sure you can explain it. A lender may want to know the source and if it’s a one-time thing or will become a regular occurrence.

“Communication with the lender is key,” Avelvelo said.

Steady employment is paramount in the mortgage application process. The conventional wisdom is that lenders want two years in the same field, according to Avelvelo, if not at the same job.

A lateral move or a better-paying job in your industry probably won’t be a problem, but a substantial period of unemployment, a move to a lower-paying position or a shift between salaried and self-employment may lead to questions.

A job change during the loan approval process itself might make it hard to verify your income information.  

Besides avoiding the red flags, there are some steps you should take before applying for a mortgage. 

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Avevelo recommends getting quotes from three to five lenders to see who can offer the best rate.

The largest home-loan provider in the U.S., Rocket Mortgage accepts applicants with credit scores as low as 580 and, with an FHA loan, you can put as little as 3.5% down. Rocket’s customer service earned praise from J.D. Power, which ranked the lender number one in its 2023 U.S. Mortgage Servicer Satisfaction Study.

If you like the in-person experience, Chase Bank has more than 4,700 branches across the U.S. Existing Chase customers earn a 0.5% discount on their home loan and the bank will waive up to $1,150 in loan processing fees for customers with a minimum deposit.

With a Chase DreaMaker loan, lower-income borrowers can put down just 3% and receive up to $7,500 toward closing costs.

When you’re preapproved, a lender agrees to specified loan terms as long as your financial situation doesn’t change before signing. A preapproval letter gives you an idea of how much house you can afford and shows sellers you’re serious about buying. 

Ally Bank says borrowers can get preapproved online in as little as three minutes. It offers free-fee conventional, jumbo, fixed and adjustable-rate mortgages, but not government-backed loans or home equity loans. Ally’s HomeReady^® loan lets qualified borrowers get approved with just 3% down.

If you’re applying for a mortgage, it’s important to ensure your financial situation is healthy and stable. Even positive moves, like job changes or big deposits, can lead lenders to raise questions.

At CNBC Select, we work with experts with specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed financial counselor Jeffrey Avevelo, who works at GreenPath, a non-profit credit counseling organization. Avevelo specializes in counseling clients about housing, bankruptcy and debt management. 

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.