You have finally located the home of your dreams and are in the preliminary stages of buying it. Did you realize that you could potentially sabotage the purchase with actions that aren’t obviously related to the home purchase? Banks are quite careful in assessing risk factors, and altering the risk factor that you pose to the bank can cost you via a higher interest rate, or cause you to miss buying your home entirely.
Don't miss out on your dream home — or any home — just through misunderstanding the lender's expectations. Watch out for these five factors when a home purchase is in your near future.
1. Increasing Your Debt — Why not buy a new car to go with your new house? There are several reasons why that's a bad idea, but the first one has to do with debt-to-income ratio (DTI). Lenders run a last-minute credit check at closing to verify that you have not incurred extra debt. This includes unusually large expenses on your credit card that can drag down your credit rating. If you take on other large debts closer to the time of purchase, you will raise your DTI and raise your risk in the eyes of the lender.
2. Changing Jobs — Obviously, if you are fired from your job, it may throw your mortgage into jeopardy, but your options are limited in that case. If you do quit a job and start a new one, you may disrupt the loan even if you are upgrading in salary. Make sure you notify the lender of job changes, because the lender will verify employment within a day of closing. Using the same logic, if you plan to retire, don’t do it immediately before your mortgage closes.
3. Changing Your Credit Profile — Opening new credit cards, even if you do not use them, is liable to raise red flags. Even paying off and closing a credit card can backfire, because it will drop your overall available credit. This could leave you with higher credit utilization than usual (credit in use divided by total credit available), and higher credit utilization means higher risk for the lender.
You should also clear up any credit disputes before applying for a loan. The lender does not know how to assess your risk properly while the dispute is ongoing and is likely to assume the worst.
4. Not Documenting Cash Flows — There are rules regarding the use of gifts to apply toward down payments. If you move a lot of money into your account to meet that down payment, lenders may be suspicious about the source of the money. Make sure that you can justify and account for your entire down payment to avoid problems, and avoid large account transfers even if they are unrelated to the down payment.
5. Missing a Payment — Missing payments of any sort can harm your credit rating, but missing them immediately before applying for a mortgage can be disproportionately damaging. Be prepared to explain why you missed a payment at such a critical time — and it had better be a great reason.
The bottom line: make as few changes as possible in the months prior to a loan application and while the application is being processed. The bank will make a thorough assessment when considering your application and will do a follow-up immediately prior to the closing. Don't make the bank guess why things have changed, or your mortgage loan could be in jeopardy.