Getting approved for a mortgage involves an underwriter evaluating your financial situation using both a current snapshot and review of your last few years. The purpose of that evaluation, though, is to try to predict the likelihood of your future success based on that information. The last thing you want to do is throw a bunch of variables into that equation at the last minute. Here are some things that, believe it or not, commonly muck up the works and should be avoided to the extent possible.
Sure, we’re talking about cars, boats, and other big-ticket items, but there is another purchase that many soon-to-be homeowners make without realizing it could potentially jeopardize their mortgage approval: furniture. Even if you pay cash a sizeable purchase could present an issue unless you have more than enough verified funds to cover any down payment, closing costs, and cash reserves required for your approval.
If you finance the purchase? Forget about it. It’s back to the drawing board because now your debt-to-income ratios change, credit scores initially go down several points immediately after new credit is opened, and it can affect other things as well. Of course, this is not a guaranty that you will not get approved with the new credit, but it is possible and it very well could throw off your expected timeline for closing.
Obviously, there are some employment changes that are unanticipated and unavoidable. These are often of the negative variety and create situations that will, at a minimum, put your home-buying plans on hold for a time. But what about those times when you are presented with an opportunity you simply cannot pass up? Well, you might have to decide what is more important to you.
If your new job is in the same industry and, for the most part, doing the same thing for the same or more money, a change can impact your timeline but would probably not negatively affect the underwriter’s credit decision. The problems arise if you are changing industries, professions, or the manner in which you are paid. For example, if you change from a salaried position to one that pays a smaller salary with commissions, your qualifying income would have to be calculated solely off the smaller salary. The commissioned income, even if it is fully expected to result in a significant increase in your income, cannot be used until you have established a history that allows the actual amounts received to be averaged over time; typically, at least one year, if not two, is required.
Open New Credit
Some of the same issues that apply when there is a major purchase can apply simply by opening up a new line of credit, even if you do not use it! The most common example of this occurs when the prospective homeowner takes trip through the local hardware or appliance store and is offered that shiny, no-interest-for-one-full-year store card. Just wait. Not only will they give it to you after you buy your home, your mailbox will be flooded with dozens of similar offers from their competitors. (My advice would be to steer clear afterwards, too, by the way!)
Accept Cash Gifts
Yes, chances are your family loves you and wants to help you succeed. And if you’re really lucky, maybe they’ll give you money, too. That is great! Many loan programs will allow you to use money you receive as a gift toward the down payment or closing costs you might have to pay to buy your home. You know there is a “but” coming, right? BUT! There are very, very strict rules on how gift funds are documented. There must be a paper trail showing where the money is coming from (not just who is giving it) all the way through the entire transfer to where it ends up in your account. Never accept or deposit any gift funds until you have spoken to me first. The process is not hard, it just has to be documented in a very precise manner.
Make Large Deposits
This kind of goes with the gift funds situation above, but even when funds come from other sources, it is important to document those sources correctly before you plop any cash in your bank accounts. This usually is not an issue if the funds come from something like a retirement account. Even if the funds are received as a check and not a direct deposit there is always a paper trail.
Issues arise when there is little-to-no paper trail to source the funds. If you sell a car on Craigslist, for example, it is important to create a bill of sale showing the names and signatures of both you and the buyer. Do not take cash if you can avoid it. Ask for a cashier’s check or money order and make a copy of it. Again, if you are going to receive a significant amount of money that you intend to deposit, you should contact me so we can discuss the best way to document the source of funds.
These suggestions are not only appropriate to those who have already started the home-buying process, but also to those who plan on starting the process within the next three months. If that is you, feel free to contact me at your convenience. I will help you obtain the information you need to make informed choices and achieve your goals.