Cynics may scoff, but getting under contract on the right home can turn even the most stoic shopper into a bit of a dreamer. From paint colours to planting a garden, picturing yourself in that property is critical for many buyers. But leave a little room for pragmatism. Remember that getting pre-approved for a mortgage and even under contract isn’t a guarantee. That prefix is there for a reason. Mortgage pre-approval is not mortgage approval.
You’ll have more hurdles to clear before a lender legally commits to funding your mortgage. Buyers who don’t know any better can inadvertently add obstacles to that path – or even kill the entire deal – between contract and closing day.
Some missteps can be costlier than others. Here’s a look at five of the worst things you can do before buying a home.
1. Go Credit-Crazy
It’s almost become cliche in the mortgage industry, but the warning still bears repeating: Don’t buy a truckload of furniture until after your mortgage closes. (Better still save up for it first rather than running up credit cards for furniture). The prohibition goes beyond sofas and settees – avoid obtaining credit for any major expense, such as a car, a boat or, yes, a new bedroom set.
Be careful with even minor expenses. If you absolutely need to obtain new credit or accrue debt before closing, talk with your mortgage broker as soon as possible.
New payments are going to affect your montly debt to income ratio and not in a good way. Hard inquiries on your credit report could also lower your credit score. That could have a major affect on the deal.
2. Shuffle Dollars and Cents
Lenders will scour your most recent bank statements as part of the underwriting process. They are looking to see that you have the required down payment and closing costs and determine the source of those funds. They look for a 90 day history.
You’ll need to explain any unusual deposits or withdrawls. Lenders will require clear documentation and a paper trail if you’re gifted funds toward a down payment. Stuffing a wad of undocumented cash into your account is going to raise red flags.
3. Get Behind on Bills
Having a late payment hit your credit report can devastate your deal. Payment history comprises about a third of your credit score.
One solitary 30 day late payment can clip 60 to 110 points from your credit score. Maybe not a huge deal if you had an 800 score, right?
Possibly. But many lenders will require at least 12 consecutive months of on time payments to qualify. They will even ask for explanation of older blemishes.
4. Co-Sign on a Loan
Co-signing a loan is arguably a bad financial move whenever you make it. But it’s especially risky during the mortgage lending process. It means you’re financially liable for someone else’s debt.
Yes, that someone else might be the most responsible person on the planet. Lenders will still need to factor that monthly obligation into your overall affordability ratio. Adding one more debt to the list could stretch too thin your debt to income ratio.
5. Changes in Employment
Probably goes without saying, but losing your job is going to be a big problem.Even job-hopping can present some major hurdles. Lenders crave stable, reliable income that’s likely to continue.
Lenders are likely to slam on the brakes if you take a new job in a different field. Or is you decide to start your own business. Or even if you get a promotion but see some or all of your income shift to a commission basis.
The bottom line: Any change to your employment is significant. Keep your mortgage broker in the loop, and ask questions when in doubt. The last thing you want is to find your dream home and you can’t qualify.
Throughout the process before shopping for a home, it can be helpful to monitor your credit scores for changes so you can know whether you need to address any problems.
Your mortgage professional can help you every step of the way!
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