The Top 5 Things Not to Do When Buying a Home
You’ve been considering buying your very first home. You’re sure your finances are in order, the market is looking good, and there’s nothing else holding you back. Being a first-time homeowner can give you a sense of pride from being able to accomplish the preparation it took just to get here.
It can also help you establish a sense of identity, having a definitive residence that you have invested so much into. But what it can also provide you with is a long-term bout with mental and emotional turmoil – if you’re not careful.
Many first-time homebuyers don’t tend to consider all the possibilities in which a home purchase can go wrong. Too many unsuspecting people are caught while daydreaming of all the awesome things they’re going to do with their new home that they fail to consider other costs involved.
From interior decorating to landscaping to making renovations and other decisions, even the most judicious of us are seized by homeowner fantasies. Pragmatism kind of just goes out the window.
Even if you’ve already got your pre-approval, found a home you love, made an offer, had your offer accepted, the contract is signed, and you’re waiting to go to escrow, there are important things to watch out for.
Being Cautious Before Buying is Key
Many mistakes made by homebuyers involve mortgages, so it’s important to have an experienced broker by your side – one that is fighting to preserve your interests. This is also someone whose advice you should be paying attention to in order to avoid potential mishaps.
Until the keys are in your hand and the deed is signed, nothing is for certain. It’s during that closing period that some unforeseen obstacles arise, and it all depends on how you act. Some mistakes are costlier than others, and some may even kill the deal entirely.
If you’re a first-time homebuyer, making mistakes can be easy. But making the wrong ones can be ruinous. Avoid the mistakes with these 5 things you shouldn’t do before buying a home.
1. DON’T MAKE ANY MAJOR PURCHASES
A lot of people try to prepare for their new home by making major purchases, from sofas and beds to dining room sets and even cars and boats. Many first-time buyers are relying on their mortgage to move in, and accruing credit during closing can affect that mortgage.
Increasing your debt-to-income ratio reduces the amount of monthly income available to pay off your mortgage. This could lead to hard inquiries on your credit report and lower your credit score, which would ultimately hurt your interest rate. In fact, it could even knock you out of the qualifying range altogether. The bank or lender might decide you can’t actually afford the home after all.
Your loan pre-approval was based on the state of your credit and the debt-to-income ratio at the time of pre-approval, and altering that can be detrimental. Even if you think paying cash for these items might reduce your risk, think again. Mortgage approval from banks includes considering cash reserves. It’s best to even be careful when making minor expenses.
If for some reason it cannot be prevented and you must obtain new credit for a major purchase, talk to your loan officer before going through with it.
2. DON’T CHANGE OR QUIT YOUR JOB
It may seem like a no-brainer when it comes to this one. Losing your job is not good for anyone. Even if you intend to change jobs, it’s best to wait. Doing so during closing could be highly problematic. In some instances, it may even be necessary to keep your home purchase close to the chest at work until after closing has happened.
The biggest issue with losing, quitting, or changing your job is with the lenders. Most importantly, you want to show lenders stability. They want to see reliable income. They often look at employment history as well, because if you’ve gone from job to job or haven’t stayed with a single job for a long period of time, they may get nervous.
Lenders want to know that you’ll be capable of making your loan payments and not be defaulting.
You make yourself less appealing to lenders by changing jobs before getting your loan, especially if it’s a job in a new field or to start your own business. Another red flag for them could be an employment shift that causes your entire income to become commission-based. A changing situation shows instability or potential issues with mortgage payments. If any change occurs, talk to your loan officer about it.
3. DON’T SHIFT AROUND YOUR FINANCES
Another important requirement of lenders is to see that your finances are in order. Not just simply in order or stable, but that they’re safe and not going anywhere. When lenders give pre-approval, they do so based on the current state of your finances. To maintain it at all costs.
Just like with your job and making major purchases, it’s best to wait until after closing before doing it. This also applies to any ideas you may have about changing banking institutions. Some buyers try to shift their finances around to better position themselves. But if a lender sees you moving money around various accounts or to other banks, they’ll want a detailed explanation with clear documentation.
Even after pre-approval, they’ll go back and review your assets and bank records again during the underwriting process, and they should still see the same thing they saw when issuing pre-approval. When the money you used for a down payment has been sitting in your account for at least two months, they call that “seasoning.” Any observable change to that will be a red flag.
4. DON’T MISS YOUR LOAN PAYMENTS
Just like with your credit, you don’t want to fall behind on loan payments. Lenders look at credit history and other loans you may have acquired for various purposes. Your credit will be viewed again before the mortgage is finalized, and any missed payments could lead to the loan being lost. Don’t believe that once the loan is committed you are safe. Lenders have the right to revoke it.
Being late on a payment once may not seem like a huge deal. And sometimes it’s not. But if that late payment shows up for a mortgage or rent payment, some lenders will cancel it altogether. Some lenders require 12 consecutive months of on-time payments to qualify for the loan. Remember, stability is key.
5. DON’T CO-SIGN A LOAN
Many will argue that co-signing any kind of loan is a bad move. It certainly is risky, if not bad altogether. But co-signing a mortgage loan is the kiss of death. Even if you’re the primary person on the loan, being a co-signer means you’re obligating yourself to be financially liable for someone else’s debt. That means that they will come looking for you when they aren’t getting their payments.
Sure, the other co-signer may be the most responsible person you’ve ever known, but there’s more to it than that. Lenders still need to factor in this new monthly obligation into your affordability profile. Considering someone else’s credit, income, and debt history will offset your assets and debt-to-income ratio with an increase. Some lenders disapprove of co-signing, period. It’s understandable you want to help someone out, but ensure that your situation and finances are stable and consistent before doing so.