Buying a new home is really exciting. At least it is until you hit a bump in the home buying process. Once you’re under contract for a home and you’re working through all the inspections and repairs, it’s easy to forget about maintaining your financial profile. But even after getting your loan pre-approved, that doesn’t mean that changes to your finances can’t reverse that approval rating. A seemingly innocent financial mistake could cause you to lose your dream home before you’ve even bought it. Be careful not to make any of the following 6 financial blunders while you’re in the process of buying a home or you could find yourself out of a home and a lot of money!
You should never change jobs, become self-employed or quit your job when you’re buying a house! You would think it would go without saying that you shouldn’t quit your job while in the process of buying a home. But I’m saying it anyway, because surprisingly, it happens. Changing jobs or becoming self-employed is also a no-go when you are contracted to buy a home.
But why should it matter to the bank if you change jobs as long as there is still money coming in? Lenders like to see longevity in employment and many of them have length of time on the job as an approval factor for lending. Length of time on the job shows them that you are able to maintain employment — and have the ability to repay a long term loan.
Lenders also know that self-employment is riskier than being an employee for an established business. Before they will lend you money on your full self-employment income, they are going to want to see proof that you have the ability to sustain your business. For most lenders, that means they want to see two years of income history for a loan approval. So unless you want to wait two years before buying a home, don’t become self-employed during the home-buying process.
You shouldn’t buy ANYTHING on credit while you’re purchasing a home. This includes vehicles and furniture. If your vehicle is disabled during your home contract period, borrow a car, take an Uber or public transit…whatever you need to do to make it work, as long as you don’t finance anything. I know it’s tempting to purchase your furniture and have it delivered the day of closing. Don’t. Here’s why:
Your credit report is closely monitored by the lender through the day of closing. If a hard inquiry is made on your credit, your finance team will be notified right away. If it was just an inquiry, says Michael Martin of Movement Mortgage in Raleigh it usually doesn’t matter much. But if you actually borrowed money for a purchase, your loan will probably be kicked back into underwriting, which can take time. And while most purchase contracts allow a grace period to allow for some delays in closing, going back into underwriting may be enough to push you past that grace period and put you in breech of contract, especially if there are other extenuating circumstances. You could lose the home. Also, it’s possible that the extra debt could make your debt to income ratios outside of the limits of your lender and you could lose financing, also causing you to lose the home. It’s always better to wait until after closing if you must finance another purchase.
Your loan approval is based upon your assets, income and credit history. When we are used to being more flexible with our spending, for example, using credit to cover short term spending overages, it can feel weird to have cash that you’re simply not allowed to touch. But you’re not allowed to pay for closing costs with credit cards or borrowed funds unless that was part of the financial history when you were approved. If you spend your closing cost money and try to use a credit card to cover the expense, that will increase your debt to income ratio and you may or may not be approved with the increased debt. Even if you are approved with the increased debt, your loan will be moved backwards in the processing loop and have to go back through underwriting, which is a time consuming process that your purchase contract may or may not survive.
Similarly to spending your closing cost money, you should also not make any large deposits into your bank account. According to Michael Martin , any deposit larger than 25% of monthly gross income must be sourced. Documentation of where the funds came from must be provided. The lender wants to make sure the funds came from an appropriate source. If the funds were a gift, a gift letter must be provided stating that the funds do not need to be repaid. A loan from a family member would be required to be considered in your debt to income ratio in the same way other debts are verified.
Changing backs in the middle of a home purchase adds extra time and paperwork to an already arduous process. Lenders want everything verified. Changing banks will not cause your loan to automatically be denied, it just makes it more difficult. The lender would need the funds being transferred to the new account sourced, just like any other funds. If you lose a withdrawal slip and your account is already closed, you might be out of luck for providing an acceptable source document.
It’s really easy to to omit debts accidentally which is why I always recommend getting a pre-approval, rather than a prequalification. You may think a debt doesn’t matter if, for example, you are expecting a bonus at work after closing and you intend to use the money to pay off the loan. Or maybe you plan to sell a vehicle after you’ve moved into the new house. But you still need to consider these kinds of debts as part of your financial profile. A lender’s approval is based on your financial viability at the time of the application and purchase. They don’t consider whether you might get a windfall to pay off a debt or might be able to sell a liability. Be open and honest about everything you owe, or better yet, get a pre-approval so nothing gets overlooked or forgotten.
Other debts that sometimes get overlooked:
Child support or alimony: Even though child support and alimony payments don’t usually show on your credit report, the lender will require copies of your pay stubs, where the deductions will be apparent.
Tax Debt: If you didn’t pay your taxes and have a payment plan, you must disclose this to your lender.
One last point about debt: Loan Officer Michael Martin says that debts with 10 months or fewer payments left on the loan can often be excluded from the debt to income ratio, at the discretion of the underwriter. However, you should still disclose debts even if there is a possibility they may be excluded because there are often more circumstances than you may be aware of. For example, a car loan with 10 months left could be excluded but a car lease with 10 months would not be.
If your brother, sister, daughter, friend wants to buy a car but doesn’t have the credit history to do it without a co-signor you might be tempted to help out a family member. But when you co-sign for a loan, it’s just as if you borrowed the money yourself. Everything in point #2 applies to debt you’ve incurred through co-signing a loan.
Remember that all people’s financial profiles are different and what may apply to one person might not apply to another. For specific information about your particular circumstances, please consult a lender. You can find my approved lenders on my Resources for Home Buyers page.
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Ellen is the founder of Harmony Realty, a socially conscious realty company. Ellen believes in empowering her clients through education and open communication. Ellen is a number-cruncher at heart and takes great pleasure in following and analyzing the trends of the housing industry. She loves communicating the big picture to her clients and helping them to understand how the market affects their sale or purchase. Her honest and down-to-earth approach allows her clients to make informed and intelligent decisions to get the most out of their offers and negotiations.