In the realm of homebuying, there’s an endless list of “should-dos,” but it’s equally vital to be aware of the “should-not-dos.” This holds true when you’re making the most substantial financial investment of your life.
Understanding what to avoid can potentially secure you better financing and pave the way to your dream home. While it may be apparent not to make drastic career changes or co-sign loans, have you ever considered how depositing cash or financing new furniture might impact your mortgage eligibility?
Despite the extensive “to-do” list associated with buying a property, having your “not-to-do” list close at hand is equally crucial.
Read on to ensure you steer clear of these common pitfalls and gain valuable insights before you submit your first offer on a property.
#1 Don’t overestimate what you can afford
Prior to embarking on your quest for the perfect property, it’s crucial to obtain pre-approval. Searching for homes that exceed your budget can prove fruitless and lead to unnecessary emotional strain.
Discovering that your pre-approved amount falls short of your expectations can also be disheartening. To prepare, it’s advisable to perform your financial calculations independently before consulting a mortgage broker. Mortgage professionals often assess your Debt-to-Income Ratio (DTI), aiming to keep it below 33%. This calculation involves dividing your monthly debt, which includes obligations like car payments and student loans (excluding bills like cell phone or utility bills), by your monthly income. For instance, if your debt totals $1,500 per month and your monthly income is $6,000, your DTI stands at 25%. They will then compute your new monthly mortgage payment to ensure your overall DTI remains under the 33% threshold.
Tracking your spending habits is an effective way to gain insight into your financial patterns. Utilizing apps like Mint or Itab allows you to record daily purchases and manage bills, helping you calculate monthly savings. Once you’ve factored in expenses like taxes and vacations, you’ll gain a comprehensive understanding of your financial allocation. Replace your current rent or mortgage payment with a monthly mortgage figure that aligns with your comfort level and lifestyle. If you enjoy dining out and traveling, ensure you’ll have the disposable income to accommodate your preferred lifestyle choices.
#2 Don’t get emotionally invested
When you stumble upon that ideal home, it’s only natural to develop an emotional connection. However, it’s crucial to maintain a balanced perspective. Depending on the season or market conditions, there might be competing offers or unexpected issues like a challenging home inspection that could potentially derail your initial offer.
Approach the home buying journey with a mindset of high intention and low attachment. This approach will help you stay resilient and optimistic as you search for your perfect abode.
#3 Don’t make any large purchases
When you’re contemplating a home purchase, exercise caution to avoid significant expenditures, such as buying a new car, splurging on furniture, or investing in a home entertainment center. Financial institutions scrutinize your financial history, including recent transactions.
The initial mortgage pre-approval you received is based on your financial status at the time of application, assessing your account balances and outstanding debts. Making substantial purchases that deplete your account balance can diminish the amount the bank is willing to lend you for your mortgage.
While the allure of furnishing your new home or parking a new car in your dream home’s driveway is understandable, it’s prudent to wait until after you’ve closed on the property and are certain about your financial capacity to manage such expenses.
#4 Don’t take out or put in large amount of cash from your bank account
In the realm of home financing, it’s essential to exercise prudence regarding significant cash transactions. Banks responsible for your financing closely monitor large deposits, as they could potentially represent loans from financial institutions or other lenders. These loans would compound your mortgage obligations, potentially adversely affecting your loan-to-debt ratio.
In the event that a parent or family member has generously gifted you a portion of your down payment, they may need to provide a formal letter confirming that the funds were a gift, with no intention of repayment. If, however, there is an agreement to repay, this would add to your monthly debt load.
In cases where you receive a substantial sum from activities such as selling a vehicle or receiving owed money, it’s advisable to substantiate the source’s legitimacy.
Most lenders typically assess up to 60 days of bank statements during the mortgage application process. To streamline your application, it’s wise to organize your documentation beforehand, ensuring you can account for any noteworthy withdrawals or deposits in a clear and organized manner.
#5 Don’t apply for more credit
The amount you can secure for financing your home hinges on your savings and income, often referred to as your capital. Accumulating additional debt can significantly diminish the approval amount for your loan, as it raises your overall debt burden. Consequently, it’s essential to exercise caution with additional credit commitments, as they can substantially impact the final loan amount you qualify for.
#6 Don’t co-sign a loan
While it might seem like a natural inclination to assist a friend or family member by co-signing a mortgage, this decision can have significant ramifications for your own loan prospects.
Co-signing a loan means that you are equally responsible for the payments. If the primary borrower defaults on their mortgage, the obligation falls on you, potentially impacting your ability to meet your own financial commitments. In such situations, it’s paramount to prioritize safeguarding your own financial interests.
#7 Don’t finance anything
When it comes to new home acquisitions, it’s common to consider new appliances, furniture, and perhaps even a large-screen TV. However, seeking financing for such purchases during your mortgage application process or before closing can be counterproductive.
Resist the urge to acquire everything you need for your new home all at once and prioritize your financial capacity to afford these items within your overall budget.
#8 Don’t switch a job, leave a job or start a company
Demonstrating financial stability stands as the paramount factor in securing a mortgage. Quitting a job or frequently changing employment can raise concerns with lenders, signaling potential financial instability.
If you have plans to pursue a new job opportunity or embark on a business venture, it’s advisable to do so after the property purchase has been successfully closed. Additionally, maintaining steady employment is crucial to reinforce your financial stability and enhance your mortgage approval prospects.
#9 Don’t miss loan payments
When you have existing loans to repay, it’s imperative not to miss any payments, especially when you’re in the process of applying for a mortgage. Even if you have a good credit history, it’s essential to exercise extra caution during this critical phase.
Occasionally, missed payments may occur due to honest oversights, such as extended work trips, medical issues, or family emergencies that temporarily distract you from managing your bills.
However, it’s crucial to recognize that a single 30-day missed payment can cause your credit score to plummet by more than 100 points. Therefore, it’s vital to stay vigilant in managing your finances, particularly when your credit score plays a pivotal role in your mortgage pre-approval process.
#10 Don’t switch banks
While changing banks may not be a frequent occurrence, occasionally, banks entice customers with offers like free TVs or cashback incentives when opening new accounts. The allure of such perks can be tempting, especially when the timing aligns with your needs. However, it’s essential to exercise caution, as such actions can adversely affect your mortgage pre-approval process.
Staying with your current bank enables you to furnish at least 60 days of transaction history and account balances, a seemingly minor detail that can significantly simplify your financial journey. Avoid the unnecessary complications that can arise from switching banks at the last minute and stick with your current banking relationship.
Conclusion
The list of considerations may appear extensive, but navigating potential pitfalls when preparing to purchase a new home becomes more manageable when you comprehend factors that can influence your decision-making and financing prospects.
To set yourself up for success, begin by organizing your finances and documentation well in advance of seeking a pre-approval. Obtaining a pre-approval prior to house hunting places you in a advantageous position. Armed with a pre-approval, you’ll have a clear understanding of what to avoid, ensuring its effectiveness through to the closing process.
Now, take the next step towards securing your dream home by reaching out to your Realtor® for advice and guidance. Postpone that new car purchase, maintain your current banking relationship, and vigilantly manage your bills. While mortgage pre-approvals may entail some stress and time commitment, the effort invested will prove well worthwhile when you finally hold the keys to your dream home!