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 dont’s is just as important as the do’s, when it comes to making the biggest financial investment of your life.
And knowing what not to do, just might land you better financing and the home of your dreams.
It may seem obvious to not do certain 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 make sure you are avoiding these common mistakes and what to be aware of before you make your first offer on a property.
#1 Don’t overestimate what you can afford
Before you even begin the search for that perfect property, it is essential that you get pre-approved. Looking for homes outside of your budget is a waste of 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.
It is best to run the numbers yourself before meeting with a mortgage broker. Mortgage brokers will likely do a debt to loan ratio. Meaning, they take your monthly debt and divide it by your monthly income. Most mortgage brokers want to keep your debt to loan or DTI 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 you cell phone or power bills) and you make $6,000 a month, your DTI is 25%. They will calculate your new monthly mortgage to make sure your overall DTI is below 33%.
A great way to understand your own spending habits is to track them. There are a number of apps you can use like Mint or Itab that allows you to record your daily purchases. There is a section for you bills and you can calculate how much you are saving a month as well.
Once you allot for things like taxes and vacations you will have a pretty good idea of where your money is going. Replace your rent or your current mortgage payment with a monthly mortgage payment you would feel comfortable with and make sure you are in that ballpark when getting a loan.
You know your own lifestyle, if you like to travel and dine, than you may want to make sure you will have the 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. 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 in 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 begin thinking about purchasing a home, make sure you avoid making any 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 and want 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 and there is less money in your account, the less money 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 large amount of cash from your bank account
Do not put in or take 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, which would damage 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 in fact 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 money back that is owned, you may just have to prove it was from a legitimate source.
Most lenders will look at up to 60 days worth of bank statements. It is best to get your documentation organized prior to applying for the mortgage and make sure 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 are approved for so adding anymore credit can greatly affect how much your loan will be.
#6 Don’t co-sign a loan
This may seem like common sense but if a friend or family member needs you to co-sign a mortgage then you might not think anything of it. But co-signing a loan can really effect your own chance of being able to get one.
If they default on their mortgage then you are responsible for the payments, which in turn would affect your ability to make your own. In cases like these, it is best to protect your own financial interests.
#7 Don’t finance anything
Along with new home purchases comes new appliances, new furniture and maybe a new big screen TV. But financing anything when applying for a mortgage or prior to closing will do more harm than good.
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 single biggest determinant in getting a mortgage. Quitting a job or switching jobs can aid in your potential risk to a lender that you are not in a good 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 do have any loans you’re paying off, make sure you do not miss any 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 having been away for work or on a trip for a substantial amount of time. Or maybe 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 be sure to stay on top of your finances, especially when your credit score is crucial to your pre-approval.
#10 Don’t switch banks
I mean you likely don’t switch banks very often, but sometimes banks offer freebies like televisions 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 the bank you have now so you will be able to provide at least 60 days of transactions and bank account balances. It may seem minor but 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, but you can easily avoid a number of problems by understanding what can affect your decision making and your ability to get financing when you are getting ready to purchase a new home.
By getting your finances and documents in order prior to getting a pre-approval, and by getting a pre-approval prior to searching for a home, you will be well ahead of the game. 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!
If you’re thinking about buying or selling this year, don’t hesitate to contact us with your questions.
Aaron Bircher And Associates
400 Evans Street
PO Box 50
Team Phone 712.746.0849