Beware the Downside Risks of Tidying Up Your Finances in Preparation for Getting a Mortgage Loan

city illusIf you’re hoping to buy a home and finance it with a mortgage (as do 86% of homebuyers, according to the National Association of Realtors’ 2015 Profile of Buyers and Sellers), getting your finances in order is a good start. You’ll want to understand how much debt, income, and assets you really have, pay off minor debts at high interest that might be harming your ability to take on more credit, and be able to show that you’re a good risk for the hefty loan you’re about to apply for.

But don’t go too far! You can, according to mortgage banker Ken McCoy of Petaluma Home Loans, actually oversimplify your finances to the point that it hurts your credit rating and your ability to qualify for a mortgage at the lowest interest rate and on the most advantageous terms.

Let’s start with your job. If the pay isn’t great, you might be inclined to look for something better before buying a home. But, warns McCoy, “Changing your job can be a bad thing if it’s in a different line of work. The lender wants to see at least two years’ history in the same occupation, basically as a sign that you’re going to stay in that job for the long haul.”

Next, there’s the matter of your assets. Like many people, you may have a checking account at one bank, a savings account at another, and a CD somewhere else. Consolidation would certainly make it easier to know what you’ve got; but, says Ken, “You’ll be creating more, not less paperwork. Lenders want to be able to trace where all the money you’re using to buy a home came from, and you’ll end up having to supply statements from the accounts you closed, just to show the paper trail.”

Finally, there’s the all-important matter of your existing debt, including credit cards. McCoy says, “Prospective homebuyers tend to think about paying off their credit cards or getting rid of debt altogether. But realize that you may qualify for a mortgage with some existing debt; and if you pay it all off, you’ve just taken valuable money you needed for the home purchase transaction. What’s more, you can actually hurt your credit score by having no existing credit, or by closing credit cards you’ve had for years.”

Of course, nothing is cut and dried in this arena. There are certainly circumstances in which, for instance, taking a new job that pays much more would make sense. But how are you to know for sure? “Six months before you want to start looking for a home, sitting down with a mortgage professional would be smart,” says McCoy. And for more tips, check out the Affording a House section of Nolo’s website.