With a never ending list of everything you ‘should do’ when purchasing a home, it seems counterproductive to focus on what you should not do. But being aware of the dont’s is just as important as the do’s, when making a major financial decision.
And knowing what not to do, just might land you better financing and the home of your dreams.
Changes to your employment, debts or available funds can affect a mortgage application. Ask your lender how to document planned changes before relying on a preapproval.
As big as your ‘to do’ list is when purchasing a property, make sure you also have your ‘not to do’ list in close reach.
Read on to make sure you are avoiding these common mistakes and what to be aware of before you make your first offer on a property.
#1 Don’t overestimate what you can afford
Before you even begin the search for that perfect property, it is essential that you get pre-approved. Looking for homes outside of your budget is a waste of your time and can wreak havoc on your emotions.
And you will be disappointed if what you are pre-approved for is substantially less than what you thought.
Lenders may review your debt-to-income ratio, or DTI: your monthly debt payments divided by your gross monthly income, before taxes and deductions. If those debt payments total $1,500 and gross income is $6,000, the ratio is 25%. A mortgage review also considers the proposed housing payment and other qualifying obligations. Limits vary by lender and loan program; there is no universal 33% cutoff. See the CFPB’s DTI explanation.
Track your spending with a spreadsheet, a paper budget or a current budgeting tool you trust. Include regular bills, savings and occasional expenses so you can compare the full housing cost with the money available each month.
Once you allot for things like taxes and vacations you will have a pretty good idea of where your money is going. Replace your rent or your current mortgage payment with a monthly mortgage payment you would feel comfortable with and make sure you are in that ballpark when getting a loan.
You know your own lifestyle, if you like to travel and dine, than you may want to make sure you will have the disposable income that suits your own life.
#2 Don’t get emotionally invested
When you find that perfect home, it can be hard not to get emotionally attached. Depending on the time of year or the market you are in, there could be other offers on the property or things could go wrong like the home inspection and the offer could fall through.
Go in the home buying process with high intention and low attachment. It will keep your spirits high when looking for that perfect place.
#3 Check with your lender before large purchases
When you begin thinking about purchasing a home, make sure you avoid making any large purchases. Large purchases such as buying a new car, a new furniture set or a home entertainment center. Banks will look at your financial history and want to see any recent activity.
A preapproval is tentative and is not a guaranteed loan offer. A large purchase could reduce cash needed for closing or reserves; financing it could add debt and affect qualification. Ask your lender before making a change that could affect your application. See the CFPB’s preapproval guide.
As tempting as it is to envision furnishing a new property or parking your new car in the driveway of your dream home, hold off till you close on the property and are sure you can afford it.
#4 Document deposits, transfers and withdrawals
Keep records of significant deposits, transfers and withdrawals. Your lender may need to verify where closing funds came from and whether any money was borrowed. A deposit or transfer is not automatically disqualifying; ask what documents are needed rather than hiding or relabeling a transaction.
A parent or family member may have gifted you part of your down payment in which case they may need to sign a letter stating that the money was a gift and you will not be paying them back. If you did in fact have to pay them back, it would be added to your monthly debt.
If you do happen to get a large sum of money from selling something like a car or if someone pays you money back that is owned, you may just have to prove it was from a legitimate source.
Ask your lender which statements and supporting records your loan requires. Two months of account activity is common in Fannie Mae purchase-loan documentation, but requirements and acceptable verification methods vary. Keep complete statements and a clear trail of funds. See Fannie Mae’s asset-verification guidance.
#5 Discuss new credit with your lender
New debt or new credit applications can affect your credit profile, monthly obligations and mortgage qualification. Talk with your lender before opening an account or taking on a payment while your loan is being reviewed. The CFPB explains the credit factors mortgage lenders consider.
#6 Don’t co-sign a loan
This may seem like common sense but if a friend or family member needs you to co-sign a mortgage then you might not think anything of it. But co-signing a loan can really effect your own chance of being able to get one.
If they default on their mortgage then you are responsible for the payments, which in turn would affect your ability to make your own. In cases like these, it is best to protect your own financial interests.
#7 Check before financing purchases
Before financing furniture, appliances or another purchase during your mortgage application, ask your lender how the new payment and credit inquiry could affect the loan. Consider both qualification and your household budget before committing.
#8 Tell your lender about employment or income changes
Changing jobs or starting a business does not automatically prevent a mortgage, but it can change the income and documents a lender can use. Tell your lender promptly about an actual or planned change, including pay structure or self-employment, and ask how it affects your application and closing schedule. Fannie Mae’s employment-verification guidance requires lenders to evaluate employment changes or discrepancies.
#9 Don’t miss loan payments
If you do have any loans you’re paying off, make sure you do not miss any payments. You likely haven’t missed any if you have good credit, but be extra cautious when applying for a mortgage.
Sometimes they’re honest mistakes like having been away for work or on a trip for a substantial amount of time. Or maybe you were in the hospital or a family member was sick so you were not as on top of your bills.
A late or missed payment can harm your credit and affect mortgage qualification. The effect varies with your credit history and the scoring model, so a specific point drop cannot be predicted for every borrower. Keep payments current and contact your creditor promptly if you may miss one. See the CFPB’s credit-score explanation.
#10 Keep a clear record if you change bank accounts
Changing banks is not an automatic mortgage disqualification. If you move funds during an application, ask your lender what records are needed and retain statements from both accounts showing the transfer. Keep closing funds traceable and accessible, and follow the lender’s documentation instructions. See Fannie Mae’s asset-verification guidance.
Conclusion
The list may be longer than you expected, but you can easily avoid a number of problems by understanding what can affect your decision making and your ability to get financing when you are getting ready to purchase a new home.
A preapproval can help you plan, but final financing remains subject to the lender’s review and loan conditions. Keep your lender informed, maintain the requested records, and discuss changes to credit, income or closing funds before assuming they will leave your loan unchanged.
