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How Much Are Home Equity Loan Closing Costs?

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Because home equity loans and home equity lines of credit (HELOCs) are secured by an asset — a home — they often come with lower interest rates than unsecured forms of borrowing. As a result, many homeowners choose to tap into their equity to fund home improvement projects, pay down debt or cover other expenses.

While a low interest rate is attractive, borrowers need to make sure they also understand the full costs of borrowing when considering loan options. One thing consumers should familiarize themselves with is the closing costs associated with home equity loans and HELOCs.

Both home equity loans and home equity lines of credit tap into a borrower’s home equity, but they operate a little differently. With a home equity loan, homeowners borrow a specific dollar amount with an interest rate and payment that, in most cases, remain fixed throughout the loan.

A HELOC on the other hand, is a line of credit, much like a credit card, and it usually has a variable interest rate. The monthly payment is based on the interest rate, as well as how much you borrow during the draw period of the loan, and it can change drastically throughout the life of the loan.

Because these two products differ, the costs associated with them often vary as well.

Common home equity loan closing costs

Many of the closing costs associated with a home equity loan are similar to those that accompany taking out an initial mortgage. Typically, borrowers can expect the following fees as a part of closing on a home equity loan.

  • Origination fee: This is the cost of initiating the loan. Origination fees vary between lenders. Some do not charge any at all, while others may charge as high as $125. Other lenders may charge an application fee instead of an origination fee.
  • Appraisal fee: To determine the value of your home, lenders may acquire an appraisal from a third party; this typically ranges from about $300 to $400, but can be higher or lower depending on the location, property and type of appraisal used.
  • Credit report fee: Some lenders will charge you for checking your credit. This may cost around $25.
  • Title search: Lenders will have a title search run to identify any issues of ownership or rights to your property. This charge can be anywhere from $75 to $100.
  • Title insurance: Depending on the amount borrowed or if there are potential title issues with the property, your lender may require title insurance. The amount of the premium is based on the size of the loan and can vary widely, from a dozen to a few thousand dollars.
  • Floodplain determination fee: Lenders may order a search to determine whether your property is in a flood zone and will require flood insurance.
  • Tax stamp fee: Depending on your local municipality, there may be a fee for recording the loan for tax purposes. This charge typically depends on the amount of your loan.
  • Notary fee: Some lenders may have an in-house notary at no charge while others will use a third party.
  • Attorney or document preparation fee: Depending on if a lawyer is used for the closing of your loan, the cost to document the loan could range from $100 to $400 at some banks.

In totality, expect to pay anywhere from 2% to 6% of your loan amount in closing costs. If you are borrowing $50,000 in home equity, this would mean anywhere from $1,000 to $3,000.

Your exact costs will depend on your state, county and lender, the type of property and amount borrowed. Your lender will provide you with a loan estimate detailing all the fees and their estimated amounts.

Additional home equity loan costs

In addition to the fees for initiating and closing on your loan, be sure you examine the other costs associated with home equity loans including the interest rate, prepayment penalty, hazard or flood insurance, and any additional fees your lender may charge.

Common home equity line of credit closing costs

Depending on the lender, a home equity line of credit may have many of the same closing costs as home equity loans.

  • Origination fee
  • Appraisal fee
  • Credit report fee
  • Title search
  • Title insurance
  • Floodplain determination fee
  • Tax stamp fee
  • Notary fee
  • Attorney or document preparation fee

Just as with home equity loans, consumers who take out a HELOC can expect to pay 2% to 6% of the loan amount in closing costs.

“For a typical home equity [line of credit] closing, closing costs would range from as low as $100 up to $2,000 or more,” according to Russell Randolph, senior vice president and head of consumer direct lending solutions at SunTrust.

Another example: Bank of America estimates their closing costs, which they cover on behalf of the customers, to generally range from $456 for a line of $25,000 up to $23,879 for a $1,000,000 line. That represents about 2% of the loan amount, though your fees may be higher depending on your loan specifics.

Additional home equity line of credit costs

Home equity lines also come with other charges that contribute to the cost of borrowing. In addition to the interest rate, of course, consumers should consider a HELOC’s annual fee, minimum withdrawal requirements, prepayment penalty and any insurance needs required by the lender.

Additionally, lenders who provide the option to “lock-in” or convert a variable interest rate to a fixed rate may do so at a higher interest rate or may charge you for canceling the lock.

How to minimize closing costs

When planning to take out a home equity loan or HELOC, consider the following to keep your costs down.

  • Find a no-closing-cost loan or HELOC. Some lenders, such as SunTrust and Bank of America, cover the closing costs on their HELOCs or waive them altogether, which can provide significant savings to borrowers. But typically, it comes with stipulations.“We will absorb the costs on behalf of the client at closing,” Randolph told MagnifyMoney. However, customers must keep their line of credit open for at least three years. “If the client were to close early, then there would be a proration of the expense passed back to the client,” he said. Make sure you know what your lender requires.
  • Roll closing costs into the loan. Some lenders allow borrowers to finance the closing costs. While this does reduce your out-of-pocket expenses, keep in mind you will be paying interest on the closing costs, which will cost you more in the long run.
  • Shop around for the best rate. Keep down the overall costs of borrowing by shopping around for the best interest rate.
  • Only borrow what you need. “Some of [the closing costs are] driven by the size of the line of credit that is being assigned,” Randolph said. Help keep your costs to a minimum by borrowing only the amount you need.
  • Take advantage of lender discounts. Many lenders offer savings on their rates and fees if you open up a checking or savings account, set up automatic payments for the loan or meet other requirements.
  • Explore loan products with no closing costs. Depending on your purpose for borrowing, some products that do not have closing costs may meet your needs.
    • Personal loans. Unsecured personal loans can be an effective alternative to tapping into your home equity. Unlike home equity products, they do not put your home in jeopardy if you have difficulty affording the payment.Keep in mind, however, that personal loans typically come with higher interest rates than home equity loans. They also lack the flexibility of being able to withdraw additional funds on demand, like you can with a HELOC. Some personal loans may still have an origination or application fee, as well as a credit check.
    • Credit card balance transfer. If your need to borrow money includes paying down debt or funding a large purchase, using a credit card with a promotional 0% APR or low introductory rate could be a good alternative.

There are no closing costs, but balance transfers usually carry a fee. This option also avoids putting your home in jeopardy, but you could end up paying a significantly higher interest rate once the introductory period ends.

When exploring other options, give some thought to the purpose of the loan. For example, if you plan to borrow money strictly for home improvement, keep in mind that you will lose the tax advantage that comes with home equity products if you choose a personal loan or credit card.

Find the best fit for your needs

When comparing home equity loans and lines of credit, the closing costs are just one piece of the puzzle. As Randolph noted, “The closing costs are an important thing to look at, but only after you’ve found the best fit [and] the best borrowing solution to meet the need.”

Be sure to take the time to research your borrowing options and potential lenders. “Once you’ve found the right borrowing solution, you can compare providers in terms of whether or not there’s an application fee or origination fee, whether or not the lender will pay closing costs, or if there are other types of fees associated with the line or loan,” Randolph advised.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alaya Linton
Alaya Linton |

Alaya Linton is a writer at MagnifyMoney. You can email Alaya here

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Why Lying On Your Mortgage Application Just Isn’t Worth the Risk

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It’s been more than a decade since the housing meltdown when “liar loans” were frighteningly common, and unfortunately the number of borrowers who lie on their mortgage applications is on the rise yet again.Leading up to the housing crisis, unethical housing professionals took advantage of loan programs that didn’t require income or asset documents, and encouraged borrowers to lie on their applications to meet the approval guidelines. That often meant pushing homeowners and homebuyers to borrow more than they could afford.

The Dodd-Frank Act of 2010 all but eliminated liar loans in the aftermath of the housing bust, but that hasn’t stopped lying on applications from making a comeback. The crime committed when lying on a home loan application is called mortgage fraud, and with new laws making it punishable with jail time and million dollar fines, it just isn’t worth the risk.

Why people lie on mortgage applications

There are a number of reasons someone might lie on a mortgage application. The two most common are fraud for housing and fraud for profit. We’ll discuss what each is and provide some examples of how they might work.

Fraud for housing

This type of fraud is related to consumers that make up or inflate information on some part of their loan application to get a home, or keep the home they have. Examples might include convincing an employer to write a “new job letter” with a salary made up to qualify, or trying to persuade an appraiser to come in at a particular value to support a cash-out refinance.

The primary motivation for this type of fraud is to either buy a home, or access some of the equity that has been built up on a home. Home equity is the difference between what your home is worth, and the balance of any mortgage financing.

Fraud for profit

Industry insiders such as real estate agents, loan officers, attorneys, appraisers and even title companies are usually the perpetrators of fraud for profit. They use the entire loan process to steal cash and equity from both lenders and homeowners. Because of the sheer magnitude of economic damage fraud for profit schemes do to local housing markets, the FBI focuses most of its resources on them.

In some cases, home buyers may be part of a real estate fraud scheme involving real estate agents, mortgage loan officers or appraisers to acquire multiple properties in a short period of time, with the intent to immediately flip them for sale at a profit. In more sophisticated fraud rings, sellers may buy and sell houses within a certain area to artificially drive up values.

Unethical loan officers or real estate agents may try to convince inexperienced real estate investors to participate in these schemes, and in many cases they may indicate that there is no harm in a little white lie. But mortgage fraud is mortgage fraud, and you don’t want to be on the other side of the law if the FBI begins scrutinizing an application.

We’ll explore the most common types of mortgage fraud, based on recent reports and studies by Fannie Mae and Corelogic.

Seven common lies on mortgage applications

Lies on a mortgage application don’t just include things like stating you make more money than you actually do, or that you received a gift from someone who isn’t really related to you. You can also commit fraud by leaving off information like properties you own with no loans on them.

Corelogic issued a Mortgage Fraud Report in 2018 listing the most common types of fraud being found on loan applications. Although they are ranked based on how frequently they occur, any type of mortgage fraud is considered a federal crime, and will put the applicant at risk of prosecution.

Lies about your income

If you’re misrepresenting how much income you make or embellishing your employment history to try to get approved for a mortgage, you’re committing income fraud. Your income carries a lot of weight when a lender is determining whether you’ll be able to repay a mortgage loan. In fact, your debt-to-income (DTI) ratio, a measure of how much debt you have compared to your pre-tax income, is just as important as your credit history.

Your employment history is also important, and lenders prefer that you have at least a two-year history of earnings at your current job, with steady pay and no gaps in employment. However, you can get a mortgage if you’ve just started a job, or have recently received a large raise.

Dishonest borrowers and their employers may generate job letters with inflated starting salaries, or showing a large raise with manufactured paystubs. The income allows them to meet the DTI requirements on houses they otherwise wouldn’t be able to afford.

The number of applications with evidence of income fraud rose more than another type of mortgage fraud according to Corelogic’s mortgage fraud report in 2018.

Lies about living or not living the home you’re buying

Occupancy fraud is when the applicant lies about how they plan to occupy the property to take advantage of lower interest rates or down payment requirements. When you fill out an application you indicate how you will occupy the property you are buying or refinancing. You may choose to live in the property as a primary residence; on occasion as a second home (commonly called a vacation home); or as an investment property that you intend to rent out to tenants to earn income.

Interests rates and down payment requirements are the lowest on primary residences, which may motivate an applicant to lie about living in a property, even if they are really going to rent it out.

Another example of occupancy fraud involves buying an investment property, but indicating it is a second home to get better rates and make a lower down payment. This is most common with out-of-state buyers who may eventually plan to retire in the location they are buying, but rent the property out until they reach retirement age.

Lying about an investment property you actually plan to live in is called reverse occupancy fraud. Current lending guidelines allow you to qualify for a mortgage using the market rent on a property you are buying as an investment property.

Buyers with a lot of liquid assets, but very little income, may commit reverse occupancy fraud so they can get the benefit of the rental income on the property they are buying to qualify.

Lies about who is benefiting from the transaction

Transaction fraud arises when one or more parties to a purchase or refinance transaction lie about why they are getting a mortgage, or try to influence people with cash or profit incentives to buy a property on their behalf.

When you buy a home, you typically sign a purchase contract agreeing to a sales price, and costs associated with the sale of the property. Everyone involved in the transaction has to agree to how much they will be paid, and disclose whether they are related to anyone who is buying, selling or representing a buyer or seller. If the parties agree to terms they believe are fair, and there is no relation either by business or family, that would be considered an “arms-length” transaction.

Lenders do allow financing on non-arm’s length transactions, but scrutinize them to make sure all the parties are working in each other’s best interests.

Reverse mortgages fraud is a type of transaction fraud that has been on the rise as reverse mortgages have risen in popularity. A reverse mortgage allows a senior citizen to access equity in their home in a lump sum, or to create monthly income and does not require a monthly payment.

A child or unscrupulous loan officer might convince an aging parent to take out a reverse mortgage with promises of investing the money, or offer them a large commission or bonus for buying a house with a reverse mortgage. The predators in these schemes are usually trying to earn large commissions, or take the cash from the reverse mortgage proceeds, and the seniors may not even be of sound mind to understand they are being taken advantage of.

Lenders perform thorough checks of contracts and parties involved, and may require higher down payments, or flat out deny a loan if they believe a non-arm’s length party is trying to coerce the borrower to take out a mortgage.

Trying to convince an appraiser to lie about a home’s value

When a home is placed for sale, the seller provides certain disclosures about the condition of the property and real estate agents agree on a fair market value. An appraiser is hired to inspect the property and determine if the agreed upon price is fair based on the recent sales of similar homes nearby.

Before the housing meltdown, lenders, borrowers or real estate agents could pick any appraiser they wanted. Unfortunately, as the housing market heated up during the boom years, appraisers were chosen based on their ability to “hit a value,” which lead to sales at inflated prices.

When the housing market collapsed in 2008, many of these homes dropped in value rapidly, resulting in loan balances being higher than their market value. This phenomenon was called “being underwater,” and resulted in a high rate of foreclosures, as homeowners found themselves with homes that were worth thousands, if not hundreds of thousands, less than their loan balances.

To prevent this problem in the future, the government passed appraisal independence requirement laws that require lenders use a random rotation of appraisers. Many lenders now employ appraisal management companies with a roster of dozens of appraisers in different housing markets, and lenders, borrowers and real estate agents risk regulatory and legal action for attempting to influence an appraiser’s opinion of value.

Not disclosing other real estate you own

Many borrowers mistakenly assume if they own real estate with no mortgage they don’t have to disclose it on the application. In other cases, they may intentionally leave the property off of their application so they are eligible for first time homebuyer programs.

Whatever the reason, this is a form of fraud, and could result in a loan denial, even if the loan is initially approved. Lenders perform a series of quality control measures, which include checking national public records databases to be sure your name or social security number are not tied to ownership of a real estate anywhere else.

Even if you don’t have a mortgage on a property, you are responsible for paying property taxes, and in most cases maintaining homeowner’s insurance. Lenders will take the annual amounts and divide them by twelve, and count the monthly payment against you when you are qualifying for a new loan.

Many of these quality control tests are done right before closing, so it’s just not worth lying on your application by omitting real estate you own, because you could end up with an 11th hour closing crisis, or worse a declined loan.

Stealing someone else’s identity to get a mortgage

According to a study by Javelin Strategy in 2017, a research based advisory firm, 16.7 million people in the U.S. were affected by some form of identity theft in 2017. Examples of identity fraud include manufacturing a social security number, or using someone’s — such as an elderly parent’s — identity to obtain a home loan.

Given how long the average loan process takes and how intensive the identity checks are, it’s the rarest form of mortgage fraud. However, if you have an elderly parent, and they indicate that they are receiving notices about past due credit that they never opened, you may want to take action immediately to determine if someone is testing the waters with their identity information.

Lying about the source of down payment funds

One of the first red flags a lender will look for on your bank statements is large deposits. Lenders want to know where the funds for your down payment came from for a few reasons.

The first is, they want to make sure a third party is not providing funds as part of a straw-buyer scheme. A straw-buyer is usually someone with good credit and stable income, and is paid a fee to take out a mortgage on a home they don’t intend to live in, or make payments on.

The buyer may be given the down payment in cash, or as a gift by fraudulently filling out a gift letter indicating a family relationship with the buyer. Because lenders don’t generally request proof of relationship with gift funds, this type of asset fraud is hard to track, and may not be discovered unless there is a fraud investigation later.

To avoid having to document a large cash deposits, more sophisticated straw buyers schemes may involve mortgage lenders producing forged bank statements. The straw buyer may also be given small amounts of cash by a real estate agent or investor to deposit over time, making it look like they are saving up for the down payment themselves.

The other red flag with large deposits has to do with money laundering. According to a report from Accuity, a global risk insurance company, real estate money laundering schemes reached $1.6 trillion a year across the globe.

Crime syndicates and drug cartels try to make their businesses look legitimate by using the funds derived from illegal activities to make “normal” purchases, such as buying real estate. Anti-money laundering measures are designed to scrutinize any funds used to buy and sell real estate, and watch for patterns of deposits that would indicate an individual is trying to stay just under the threshold for cash deposits that might trigger a money laundering investigation.

Why it’s not worth it to lie on a mortgage application

There are a number of reasons you should avoid lying on an application. The consequences are severe, and laws passed since the housing crisis deal more harshly with incidences of mortgage fraud than in past years.

You could go to jail and be fined

Under current U.S. federal and state laws, a conviction for mortgage fraud could result in a 30-year federal jail sentence, and up to $1 million in fines.

Your loan could be called due

If a lender finds that you committed fraud, they have the right to call the entire loan balance due. If you are unable to sell the home, you could end up with a foreclosure, and the lender could sue you for any losses they incur on the resale.

Your employment options could also be severely limited in the future. Businesses take financial fraud very seriously, especially when they are making hiring decisions. If you have a conviction on your record for any type of mortgage-related fraud, your ability to get a job could be severely limited.

Financial service employment will be virtually impossible, and employers may not consider you for any position that puts you close to a source of money, even if it’s just running a cash register at a convenience store or using a computer system to input food orders at a restaurant as a waiter.

What to do if you spot fraud in your neighborhood

If someone has asked you to lie on a loan application, or you know someone in your neighborhood who has indicated that a “little lie” won’t hurt anyone, you should be aware of the proper authorities to contact. The cost of mortgage defaults due to fraud is often paid by homeowners in the neighborhood when the loans inevitably default once the scheme is discovered by authorities. In large scale mortgage fraud rings, like the ones that occurred during the housing meltdown, taxpayers can end up on the hook for bank bailouts.

You can take action by contacting the following agencies to prevent or investigate mortgage fraud:

U.S. Department of the Treasury Financial Crimes Enforcement Network: Provides information and resources on mortgage fraud.

The Department of Housing and Urban Development (HUD): Besides providing information about homeownership, you can contact a HUD counselor. They are trained to spot mortgage fraud, and may have resources for contacting the appropriate authorities in your area.

The Federal Bureau of Investigation (FBI): The FBI does investigate financial crimes involving mortgage fraud, so you can contact them if you feel there is a major fraud scheme going on in your neighborhood or town.

Final thoughts: Lying on a loan application is not worth it

Lenders have a great deal of responsibility for making sure loan applicants can repay their mortgages. Besides making sure you have the income, assets and credit to support your loan request, lenders need to verify the documentation provided is valid and verifiable.

There are a number of different reports lenders run to protect themselves from making fraudulent loans, because they can be asked to buy back a loan if an audit by a regulatory agency discovers they didn’t take proper fraud prevention measures. If any housing professional suggests that you omit or lie about something on your application, notify the proper authorities. It’s not worth risking jail time, million dollar fines or becoming unemployable because you lied on a mortgage application.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
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Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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Don’t Apply for New Credit Before Your Mortgage Closes

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Purchase agreement for house

When you are in the process of buying a home, it’s easy to get ahead of yourself. You start shopping for all the furnishings you’ll need, lured by all the “same-as-cash” credit offers you’ll see at home-improvement stores, furniture retailers, and bed and bath shops.

The 10% discount you get by signing up might be a great savings for that purchase, but it could also cost you your mortgage, if you haven’t closed yet.

Lenders perform a variety of checks on your accounts up until the day of your closing. Any changes to your income, credit or money in the bank could not only delay your closing — it could turn a loan approval into a denial.

We’ll discuss why you shouldn’t apply for new credit before your loan closes, and suggest what to do if you already did.

Why opening new credit before closing is bad

Mortgage approval is contingent on your financial information from the day you submit the application until the day the house is recorded into your name. Many first-time homebuyers don’t realize the verification process is ongoing, even after you get the initial OK. Lenders will even double-check your employment and credit — the two biggest factors affecting the decision to lend you money — right before closing, and in some cases even the day of closing.

Below are some of the reasons why applying for new credit before closing could create problems for you before closing.

Your debt-to-income ratio could rise too high

Your debt-to-income (DTI) ratio is a measure of the total debt you owe divided by your before-tax income. Depending on the lending program you apply for, the DTI ratio maximum is anywhere from 41% to around 50%.

Your loan officer won’t usually go over what your DTI ratio is — if you’ve gotten a loan approval, you can safely assume you meet the guidelines. However, you may be right on the borderline of the maximum for your mortgage; if a new credit account balance pops up, the resulting monthly payment could you push you over the limit.

You could get a new monthly payment on your report

Many retail home goods stores offer “No payment due for 12 to 24 months” credit lines, giving buyers the impression that there will be no payment counted against them since it is the same as a cash purchase if you pay off the balance within the specified time period. However, these accounts don’t mean “no payment” to a mortgage lender.

If the creditor doesn’t report a monthly payment, the underwriter will have to calculate an estimated minimum, which may be as high as 5% of the balance of the account — so that $2,500 furniture account could add a $125 per month payment to your total debt, even if you aren’t required to make a payment to the creditor for 12 to 24 months on a “same as cash” incentive offer.

Your credit score could drop

It can take a while to find a home, and credit reports are generally only good for 90 days. If you don’t find a home and close within that time frame, your lender will have to pull a completely new credit report.

If you’ve racked up some credit cards or even inquired about new credit several times, your score could easily drop. The lower your score, the higher your rate will be, and even if you’ve locked in your interest rate, if your score drops because you charged up new credit, you’ll be stuck with whatever the rate and costs are for the most current credit score.

You might have to document your assets again

Don’t be surprised if a lender suddenly asks for some updated bank statements if you recently applied for new credit. Some borrowers are given bad advice to charge up their credit cards to use for a down payment, but credit cards have never been an acceptable source of a down payment.

The only type of borrowed money you can use would be against a fixed asset like a car or boat, and even then you’ll have to provide a lot of documentation to show how much the asset was worth, confirm you owned it at the time of the loan, and show the transfer of all the money from the lender.

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How lenders track your credit during the loan process

When you get approved for a home loan, mortgage companies are committing to lending you hundreds of thousands of dollars payable over a very long time, in most cases 30 years. Because of that, they need to make especially sure that at the time they make the loan, they can demonstrate that you have the ability to repay it.

If for some reason they make a loan you can’t afford, they face consequences from regulatory agencies, and ultimately lose money incurring the legal costs of a foreclosure. That’s why they have policies that pay special attention to how you manage your credit during the loan process.

Initial credit pull

When you apply for a home loan, one of the first things you lender will do is run an initial credit report to take a look at how you manage your credit. Sometimes the information on the credit bureaus can lag a few months, so if you recently applied for credit, make sure the balances and payments are reflected on the loan application you receive from your loan officer.

If not, provide your most current statement so the loan officer can accurately pre-qualify you for a mortgage.

Pre-closing soft pull

Once your loan approval is provided, there will be conditions that need to be met before your closing papers can be scheduled. Your loan officer will let you know if you need to provide anything, such as updated pay stubs or bank statements, before closing, and you’ll need to finalize things like your homeowner’s insurance company.

However, there are things that will be happening behind the scenes that you need to know about. One of the most important is the “pre-closing soft pull.”

A “soft-pull” is simply an update to track any activity on your credit since the initial approval. If your balance rises for something small, like charging your appraisal fee to a credit card, you won’t have anything to worry about.

What to do if you’ve already applied for new credit before closing

If you’ve already applied for new debt before your closing, don’t panic — just get the terms of the loan as soon as you can to your loan officer. The sooner you do, the sooner you’ll know if you have to take any drastic measures to fix any qualifying issues that may come up.

If there is a problem, you can take the following immediate steps.

Contact your loan officer immediately

Lenders are in the business of making loans, and the more proactive you are about communicating about any changes to your credit, income or money you have for a down payment, the sooner they can come up with a solution to keep your purchase from falling apart.

Get the terms of your new payment in writing

If the account is brand new, you’ll need to get something in writing as soon as possible that verifies what your new monthly payment will be. If you opened a deferred payment account, at least get something showing the balance so the underwriter can calculate the minimum payment that will be counted against you.

The lender will need to get it added to your credit report as soon as possible, and that process can take several days, since they have to coordinate with a third-party credit reporting agency.

Be prepared to pay it back and close it out

If you don’t qualify because of the new debt, the best plan is to pay if off and close it out, or return the items and get as much of a refund as you can. If you don’t have the assets to do that, you may have to make a painful phone call to a relative to get them to gift you money to pay it back, or you may be living on that brand new couch in their living room when your home purchase loan is declined.

You may have to switch loan programs or pay a higher rate

As mentioned above, not all DTI ratio requirements are the same. If you’re approved for a conventional loan, you’ll have a hard stop at a 50% DTI ratio, and even a fraction of a percentage over that will result in a loan denial.

You may have to switch to a more lenient loan program like the one the FHA offers, but that will mean a new approval, and potentially a new appraisal that meets the more stringent property guidelines required by the FHA. That is also the case if your score drops after updating an outdated credit report — conventional loans won’t be approvable below a 620 credit scores, while FHA will give you flexibility down to 580.

Either way, be prepared to jump through some extra hoops to undo the damage that applying for credit before closing can do to your loan approval.

Final thoughts: Avoid opening new credit until keys are in your hands

The best rule of thumb is to limit your credit use until you’ve got confirmation that the title company has recorded you as the owner of your new home, and you have the keys in your hand. If you have an emergency like a car that breaks down, or incur a major medical expense that you don’t have the cash to cover, talk to your loan officer about strategies to avoid any last minute crisis with your home loan closing.

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Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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