Once you have a home under contract, it is typical to start dreaming of the upgrades you will do to your new home. Maybe some new paint, wallpaper, or new furniture is in order. But WAIT! Now is not the time to be making any major purchases, opening new lines of credit, or even making major deposits into your account.
Before you began your home search, you most likely received “pre-approval” for a home loan. The “pre” is an important part – you have not yet received final approval for the loan. You’ll have more hurdles to clear before a lender legally commits to funding your home loan. Buyers who don’t know any better can inadvertently add obstacles to that path – or even kill the entire deal – between contract and closing day.
Don’t Do This Before Closing On Your Home
Some missteps can be costlier than others. Here’s a look at five of the worst things you can do before buying a home, along with a few things you CAN do before closing.
Don’t go Credit-Crazy
It’s almost become cliché in the mortgage industry, but the warning still bears repeating: Don’t buy a truckload of furniture until after your loan closes. The prohibition goes beyond sofas and settees – avoid obtaining credit for any major expense, like a car, a boat or, yes, a new bedroom set.
Be careful with even minor expenses. If you absolutely need to obtain new credit or accrue debt before closing, talk with your loan officer as soon as possible.
New payments are going to affect your monthly debt-to-income ratio (and residual income on a VA loan), and not in a good way. Hard inquiries on your credit report could also lower your credit score. That might hurt your interest rate if you haven’t locked or even knock you out of qualifying range all together.
Don’t Shuffle Dollars and Cents
Lenders will scour your most recent bank statement as part of the pre-approval process. It’s not like they forget about it after that. They’ll take another look at your assets and bank records again during the underwriting process.
You’ll need to explain any unusual deposits or withdrawals. Lenders will require clear documentation and a paper trail if you’re putting gift funds toward a down payment or closing costs. Stuffing a wad of undocumented cash into your account is going to raise some red flags.
Don’t Get Behind on Bills
Having a late payment hit your credit report before closing can devastate your deal. Payment history comprises about a third of your credit score.
One solitary 30-day late payment can clip 60 to 110 points from your credit score. Maybe not a huge deal if you had an 800 score, right?
Possibly. But if that 30-day late blemish is a mortgage or rent payment, some lenders will boot your application altogether. Many will require at least 12 consecutive months of on-time payments in order to qualify for a home loan.
Don’t Co-Sign on a Loan
Co-signing a loan is arguably a bad financial move whenever you make it. But it’s especially risky during the mortgage lending process. It means you’re financially liable for someone else’s debt.
Yes, that someone else might be the most responsible person on the planet. Lenders will still need to factor that new monthly obligation into your overall affordability profile. Adding one more debt to the list could stretch too thin your debt-to-income ratio and assets.
Don’t Change Employment
Probably goes without saying, but losing your job is going to be a big problem. Even job-hopping can present some major hurdles. Lenders crave stable, reliable income that’s likely to continue.
Lenders are likely to slam on the brakes if you take a new job in a different field. Or if you decide to start your own business. Or even if you get a promotion but see some or all of your income shift to a commission basis.
The bottom line: Any change to your employment is significant. Keep your loan officer in the loop, and ask questions when in doubt. The last thing you want is to waste time and money on a home loan you’re never going to get.
Throughout the mortgage process, it can also be helpful to monitor your credit scores for changes so you can know whether you need to address any problems. To do that, you can use a free tool like Credit.com’s Credit Report Card, which updates your credit scores and an overview of your credit report every month.
Do These Things Before Buying a Home
There are some things you can do before buying a home that will make it easier to qualify and close on your purchase.
Pay Your Bills on Time
Be sure and pay all your bill on or before the time they are do. Lenders do NOT like to see any late payment notices show up on your credit report right before closing. This raises red flags and can cost you a higher interest rate.
Keep Your Bank Account Clean
Keep your bank account clean and simple. No large unexplained deposits and certainly no bounced checks or late fees. Lenders like to see stable income and expenses and anything unusual can raise red flags. If you need to make a large purchase or deposit, be sure and call your lender first and ask them how they recommend you handle the transaction.
Ask Your Loan Officer if You Have Questions
If you have a change in financial status, or you need to make a purchase, or your job situation may change, talk to your loan officer BEFORE making any moves. They can advise you on the impact of such a decision and possibly provide alternative methods that won’t affect your home purchase. Communication with your loan officer is crucial prior to closing on your home.