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 dos is as essential as making the most significant financial investment.
And knowing what not to do might land you better financing and the home of your dreams.
It may seem obvious not to do things like switching your job or co-signing a loan, but did you ever think that depositing cash or financing a new piece of furniture could affect your ability to get a mortgage?
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 ensure you avoid these common mistakes and what to be aware of before making your first offer on a property.
#1 Don’t overestimate what you can afford
Before you even begin the search for that perfect property, you must get pre-approved. Looking for homes outside your budget wastes 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.
Running the numbers yourself before meeting with a mortgage broker is best. Mortgage brokers will likely do a Debt-Service Ratio ratio. Meaning they take your monthly debt and divide it by your monthly income. Most mortgage brokers want to keep your debt to a loan or DSR below 33%. So, for example, if your debt is $1,500 a month (and debt accounts for debt obligations like car payments and student loans, not bills like your cell phone or power bills) and you make $6,000 a month, your DSR is 25%. So they will calculate your new monthly mortgage to ensure your overall DSR is below 33%.
A great way to understand your spending habits is to track them. There are several apps you can use, like Mint or Itab, that allow you to record your daily purchases. In addition, there is a section for your bills, and you can calculate how much you save a month.
Once you allot for taxes and vacations, you will have a pretty good idea of where your money is going. Next, replace your rent or current mortgage payment with a monthly mortgage payment you would feel comfortable with and ensure you are in that ballpark when getting a loan.
You know your lifestyle; if you like to travel and dine, you should ensure you have a 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. But, 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 into the home buying process with high intention and low attachment. It will keep your spirits high when looking for that perfect place.
#3 Don’t make any large purchases
When you consider purchasing a home, avoid making 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 to see any recent activity.
The mortgage pre-approval you were given is based on how much money you had in your account and how much money you owed at the time you applied. If you make a large purchase with less money in your account, the less the bank will be willing to lend you for your mortgage.
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 Don’t take out or put in immense amounts of cash from your bank account
Refrain from putting in or taking out large amounts of cash. The bank financing, you will flag large deposits coming in because they may be loans from a bank or another lender. You, in turn, would have to pay back those loans on top of your mortgage, damaging your loan-to-debt ratio.
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 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 cash back that is owned, you may have to prove it was from a legitimate source.
Most lenders will look at up to 60 days’ worth of bank statements. Therefore, organizing your documentation before applying for the mortgage is best to ensure you can account for any large withdrawals or deposits.
#5 Don’t apply for more credit
How much you will get to finance your house will come down to how much money you have saved and how much money you have coming in, or your capital. Any extra debt will decrease the amount you can be approved for, so adding any more credit can significantly affect how much your loan will be.
#6 Don’t co-sign a loan
This may seem common sense, but if a friend or family member needs you to co-sign a mortgage, you might not think anything of it. But co-signing a loan can affect your chance of being able to get one.
If they default on their mortgage, you are responsible for the payments, which would affect your ability to make your own. In cases like these, it is best to protect your financial interests.
#7 Don’t finance anything
Along with new home purchases come new appliances, new furniture and a new big-screen TV. But financing anything when applying for a mortgage or before closing will do more harm than good.
Please stay clear of the temptation to get every last thing you need for a new home and focus on your ability to afford it in the first place.
#8 Don’t switch a job, leave a job or start a company
Your ability to show you are financially stable is the most significant determinant in getting a mortgage. Quitting or switching jobs can aid your potential risk to a lender that you need to be in a better financial or stable position.
If you are planning on applying for a new position or starting a company, it is best to do it once you have closed on the property. And, of course, try not to get fired.
#9 Don’t miss loan payments
If you have any loans you’re paying off, make sure you get all 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 being away for work or on a trip for a substantial amount of time. Or you were in the hospital, or a family member was sick, so you were not as on top of your bills.
But having a 30-day missed payment can drop your credit by more than 100 points. So stay on top of your finances, especially when your credit score is crucial to your pre-approval.
#10 Don’t switch banks
You likely don’t switch banks often, but banks sometimes offer freebies like television sets or cash back when opening an account. It can be tempting, especially given the timing, but detrimental to a mortgage pre-approval.
Stick with your current bank to provide at least 60 days of transactions and bank account balances. It may seem minor, but it can make your life a lot more complicated than it needs to be if you switch your bank last minute.
The list may be longer than you expected. Still, you can easily avoid several problems by understanding what can affect your decision-making and your ability to get financing when you purchase a new home.
You will be well ahead of the game by getting your finances and documents in order before getting a pre-approval and a pre-approval before searching for a home. And once you have the pre-approval, you will know everything not to do, so it is still effective on closing.
And that’s it! Hold off on that new car, stick with the bank you’re with and stay on top of your bills. Mortgage pre-approvals can be stressful and time-consuming but well worth the extra effort once you get the key to your dream home!