Couple reviewing iQRATE Mortgages documents with concern.

Credit Mistakes That Kill Houston Mortgage Approvals

Q: Why is it risky to apply for new credit cards or loans while my mortgage is being processed?

A lender's seasoning period is a mandatory waiting time after you purchase or refinance a property before you can access the full after-repair value (ARV) for a cash-out refinance. Most DSCR lenders require a seasoning period of 6 to 12 months. Refinancing before the seasoning period concludes typically means the lender will base the loan amount on your original purchase price plus rehab costs, which severely limits the amount of equity you can cash out. Waiting until after the period allows you to borrow against the full market value you created through your renovations.

Q: How can financing a large purchase like a car or furniture affect my mortgage approval?

To justify a higher appraised value, you should provide the appraiser with a detailed and organized renovation packet. This packet removes guesswork and provides concrete evidence of the work performed. It should include: a cover letter summarizing the major upgrades, a detailed scope of work document itemizing all improvements, compelling before-and-after photos showing the property's transformation, copies of paid invoices and receipts for materials and labor, and copies of any official building permits that were issued for the work.

Q: If I co-sign a loan for someone, will it impact my ability to get a mortgage?

No, LTV limits for cash-out refinances vary significantly among different DSCR lenders, as each has its own guidelines and risk tolerance. While purchase loans may reach 80% LTV, cash-out refinances are often capped at 70% or 75% LTV. The specific LTV offered to an investor is influenced by several factors, including: Credit Score (higher scores typically qualify for higher LTVs), DSCR Ratio (a stronger income-to-debt ratio may result in a better LTV offer), Property Type (a single-family home might receive a higher LTV than a multi-unit property), and Loan Amount (some lenders may offer different terms based on the size of the loan).

Q: Should I close my old, unused credit accounts to clean up my finances before getting a mortgage?

Your property's monthly rental income is the foundation of a DSCR loan approval. The formula is: DSCR = Gross Rental Income / Total Monthly Housing Payment. A higher rent results in a higher DSCR. This proves to the lender that the property can comfortably support a larger loan payment, which in turn allows you to qualify for a larger loan amount and maximize your cash-out.

Q: How do mortgage lenders view large cash deposits in my bank account?

Yes, it is often possible to pay for closing costs with the proceeds from your new loan, meaning you don't need to bring cash to closing. However, these costs are not added on top of your loan limit. Instead, the closing costs are subtracted from the total cash-out funds available to you after your existing mortgage is paid off. The total loan amount, including these costs, cannot exceed the lender's maximum LTV limit based on the property's appraised value.

Q: Will starting a new dispute on my credit report delay my mortgage closing?

Investors can make several avoidable errors that reduce their available cash-out funds. The most common mistakes include: Poor Documentation (failing to provide an appraiser with a thorough renovation packet can lead to a conservative and lower valuation), Refinancing Too Soon (not waiting for the lender's seasoning period to expire is a costly mistake that forces the loan to be based on cost rather than value), Lacking a Tenant (attempting to refinance a vacant property is less favorable, as lenders prefer the security of a signed lease over estimated market rents), and Ignoring Lender Differences (accepting the first loan offer without comparing options can mean missing out on better LTV limits or shorter seasoning requirements from other lenders).

Q: Can shopping around with different mortgage lenders hurt my credit score?

The ideal time to begin the refinance process is 30 to 45 days before your lender's seasoning period expires. This allows you to gather all necessary documentation, secure an appraisal, and complete underwriting so that you can close immediately once the seasoning requirement is met. Crucially, by this time, the property should also be 'stabilized,' which means you have a qualified tenant in place with a signed lease and have collected at least the first month's rent.

Specialized In Jumbo Loans, Investor Loans, DSCR Loans, Non-QM Financing, Commercial Mortgages, and Tax-Informed Lending Strategies

Published By

David Ghazaryan

Owner / Broker / Banker

Contact Me At

(702) 766-3744

NMLS 1486726

Let's Connect

TL;DR

Making seemingly minor financial adjustments, such as opening a new credit card or financing a large purchase, can unexpectedly jeopardize your mortgage approval during the underwriting process.
It is critical to maintain a stable financial profile by avoiding new credit applications, significant purchases, and other changes until after your home loan has officially closed.
This guide outlines several key credit-related mistakes that can derail a home loan approval, emphasizing the importance of careful financial management while seeking a mortgage.

Why should I avoid applying for new credit cards or auto loans before closing?

Applying for new credit while you're in the mortgage process is one of the quickest ways to jeopardize your home loan approval. When you apply for a new credit card, auto loan, or personal loan, the lender performs a 'hard inquiry' on your credit report. Each hard inquiry can temporarily dip your credit score by a few points. While one inquiry might not seem significant, multiple inquiries can signal financial instability to a mortgage underwriter.

More importantly, opening a new account does two things that underwriters scrutinize heavily:

It lowers the average age of your credit accounts. Lenders prefer to see a long, stable credit history. A new account instantly reduces your average credit age, which can negatively impact your score.
It increases your potential debt. Even if you don't use the new credit line, it adds to your total available credit and presents a risk. If you do use it, the new monthly payment is added to your debt-to-income ratio, which we'll cover next.

Example: Let's say your credit score is 745, which qualifies you for a great interest rate on a home in Houston. During the underwriting period, you apply for a new store credit card to get a discount on furniture for your new home. The hard inquiry drops your score to 738. This drop might push you into a different tier for interest rates or private mortgage insurance (PMI), potentially costing you thousands over the life of the loan or even leading to a denial if your score was on the cusp of a lender's minimum requirement. (The data, information, or policy mentioned here may vary over time.)

The Underwriter's Perspective

Mortgage underwriters perform a final credit check just days, or sometimes hours, before closing. They are looking for any changes to your financial profile since the initial application. A new account appearing at this stage is a major red flag, forcing them to re-evaluate your entire application from scratch with the new debt factored in. It's a risk most homebuyers should never take.

How can making a large purchase on credit affect my debt-to-income ratio?

Your debt-to-income (DTI) ratio is a cornerstone of mortgage qualification. It measures your total monthly debt payments against your gross monthly income. Most lenders have strict DTI limits, often capping it around 43% to 45% for conventional loans, though some programs allow for higher ratios. (The data, information, or policy mentioned here may vary over time.) Making a large purchase on credit—like a car, furniture, or appliances—directly increases the 'debt' side of this crucial equation.

A couple considers a large purchase that could affect their mortgage application.

When you finance a large purchase, you add a new monthly payment to your financial obligations. This new payment is added to your existing debts (student loans, credit card payments, etc.) and your proposed new mortgage payment. If this new total pushes your DTI ratio over the lender's threshold, your loan will be denied.

Example: Imagine a homebuyer in Katy with a gross monthly income of $8,000. Their existing debts (student loans, credit card minimums) total $1,000 per month. The proposed mortgage payment (including taxes and insurance) is $2,400.

Initial DTI Calculation: ($1,000 + $2,400) / $8,000 = $3,400 / $8,000 = 42.5%

This DTI is acceptable for the lender. Excited about their new home, the buyer finances a new car with a $500 monthly payment two weeks before closing. The underwriter runs the final numbers:

New DTI Calculation: ($1,000 + $500 + $2,400) / $8,000 = $3,900 / $8,000 = 48.75%

Suddenly, their DTI is well over the lender's 45% limit. The mortgage approval is reversed, and the home purchase falls through, all because of one purchase made at the wrong time.

Does co-signing a loan for a family member appear on my credit report?

Yes, absolutely. When you co-sign a loan for someone, you are not just a character reference; you are legally 100% responsible for that debt. The loan will appear on your credit report as if it were your own. Mortgage lenders treat co-signed debt exactly the same as your primary debts.

The entire monthly payment for the co-signed loan will be included in your DTI calculation, even if you are not the one making the payments. This can dramatically increase your DTI ratio and potentially disqualify you for a mortgage.

Can I Exclude a Co-Signed Debt?

In some limited circumstances, you may be able to have the co-signed debt excluded from your DTI. To do this, you typically need to provide the lender with documented proof, such as 12 consecutive months of canceled checks or bank statements from the primary borrower, showing they have been making the payments on time, in full, from their own account. However, this is not guaranteed and is subject to underwriter discretion. (The data, information, or policy mentioned here may vary over time.) The safest rule is to avoid co-signing for any loans in the 1-2 years leading up to your own mortgage application.

Can closing old, unused credit accounts actually lower my credit score?

It may seem like a responsible financial move to close old credit card accounts you no longer use, but doing so during the mortgage process can backfire by lowering your credit score. This happens for two key reasons:

A person reviewing their credit card accounts and credit score.

It increases your credit utilization ratio. This ratio is the amount of credit you're using compared to your total available credit. Experts recommend keeping it below 30%. When you close an account, you lose that available credit, which can cause your utilization ratio to spike.
- Example: You have two credit cards. Card A has a $2,000 balance and a $5,000 limit. Card B has a $0 balance and a $5,000 limit. Your total balance is $2,000 and total credit is $10,000, for a utilization of 20%. If you close Card B, your total credit drops to $5,000. Your utilization instantly jumps to 40% ($2,000 / $5,000), which can lower your score.
It can reduce the average age of your credit history. The length of your credit history makes up about 15% of your FICO score. Closing your oldest accounts can shorten this average age, which lenders view unfavorably.

Instead of closing accounts, simply stop using them and keep them open with a zero balance. This maintains your available credit and credit history, helping to keep your score stable as you seek a mortgage in Katy or Houston.

Why is it critical to continue making every single payment on time in Katy?

A perfect payment history is the single most important factor in your credit score, accounting for 35% of your FICO score. During the mortgage underwriting process, your payment history is under a microscope. Even one late payment can have devastating consequences.

A payment that is 30 days or more late will be reported to the credit bureaus and can cause a significant drop in your credit score, often by 50-100 points. This is more than enough to change your interest rate, increase your PMI costs, or result in an outright denial. Lenders see a recent late payment as a major indicator of risk, suggesting you may be unable to handle the additional financial responsibility of a mortgage. Set up automatic payments for all your bills to ensure nothing is missed while your loan is being processed.

How do lenders view large, undocumented deposits into my bank accounts?

Lenders are required by federal law, including the Patriot Act, to source and document all funds used for a down payment and closing costs. Any large, unusual, or non-payroll deposit into your bank accounts will raise a red flag for the underwriter. They need to verify that the money did not come from an undisclosed loan, which would affect your DTI, or from illicit sources.

A 'large deposit' is typically defined as any single non-payroll deposit that exceeds a certain percentage of your monthly income. (The data, information, or policy mentioned here may vary over time.) If you deposit a significant amount of cash or receive a large sum from a friend or relative, you must be prepared to document it.

For a gift, you will need a formal 'gift letter' from the donor stating the money is a gift and not a loan, along with a paper trail showing the funds leaving their account and entering yours. For cash, it can be very difficult to source. It is best to avoid making large cash deposits into your accounts for at least two to three months before and during the mortgage application process.

Will disputing an old account on my credit report stall my Houston mortgage?

Yes, it very likely will. While it's wise to correct errors on your credit report, initiating a new dispute during the mortgage process can bring everything to a halt. When an account is listed as 'in dispute' on your credit report, the automated underwriting systems used by most lenders cannot provide a clear approval. The system sees the dispute as an unknown variable that could potentially change your credit score or DTI ratio once resolved.

An underwriter will typically require you to resolve the dispute before the loan can move forward. This means you'll have to cancel the dispute and have the 'in dispute' comment removed from your credit report, which can take weeks. If the disputed item is a significant derogatory mark, resolving it might be necessary, but this should be done months before you apply for a Houston mortgage, not during.

Can shopping for mortgages for low credit scores with multiple lenders hurt my score?

This is a common concern, but the credit scoring models are designed to allow for rate shopping. While each application does trigger a hard inquiry, FICO and VantageScore models have a built-in 'shopping window'. All mortgage-related inquiries that occur within a specific period (typically 14 to 45 days, depending on the scoring model) are treated as a single inquiry for scoring purposes.

This allows you to shop with multiple lenders in Houston or Katy to find the best rate and terms without damaging your credit score. The key is to do all of your shopping within that short window. Spreading your applications out over several months will result in multiple hard inquiries that can lower your score.

The damage comes from applying for different types of credit in a short time. Applying for a mortgage, a car loan, and three credit cards within a month will hurt your score. Applying for five mortgages within two weeks will not. Navigating the mortgage process requires careful planning to protect your credit. If you're concerned about your financial profile or have a unique situation, understanding every step is key. A mortgage strategist can help you create a clear path to approval and avoid these common pitfalls.

Understanding these credit pitfalls is the first step. When you're ready to move forward with a clear plan, our team is here to help you secure your home loan. Start your application today.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.