Buying a new home hinges on several key things falling into place: finding the right property and builder, negotiating a price you can afford and securing the financing to pay for it.
Many homebuyers successfully navigate all three criteria — only to make some critical missteps prior to closing the deal that can jeopardize their homeownership dreams. Here are a few dos and don’ts to remember when buying your new home.
DO get pre-approved.
Not only does pre-approval ensure that you are shopping for homes in price ranges you can afford, but it also can speed the process once you find the right home. Federal regulations restrict what a lender can send to a non-qualified applicant.
“If there is not a pre-approval and the application is received at the same time with the contract, the lender cannot send the list of items to be obtained and reviewed (tax returns, W2s, pay stubs, bank statements) until after disclosures have been sent and signed,” says Joan Dumais, senior mortgage consultant with Bancorp South in Austin, Texas. That can delay the process from one to three days.
DO check your credit report.
Visit annualcreditreport.com for a free copy of your report. You might be surprised to find numerous unsolicited credit inquiries from various vendors wanting to make you offers of credit cards or loans. Excessive credit inquiries can negatively impact your credit score — but you can put a stop to them by opting out via an 800-number provided in your credit reports.
DON’T change jobs.
Some buyers will change jobs without letting their lender know because they think that if it’s a better salary, it won’t matter. Wrong. Most investors require 30 full days of paystubs, so changing jobs will delay closing until the 30-day paperwork is obtained.
In some cases, it can even kill the deal altogether. “I once had a borrower tell me, as she was headed to sign closing documents, that she had just retired,” recalls Dumais. “She had to pay cash for the house, since we had used that income to qualify her.”
DO continue paying credit cards and other debt.
There perhaps is nothing more critical to your loan than your FICO score. It affects your rate, the program, the cost of any mortgage insurance and your hazard insurance. Make sure you continue paying any credit card bills regularly and stay current on car or other loans. And, don’t open or close credit cards or get cash advances on a card or line of credit.
DON’T make major new purchases on credit.
“You absolutely do not want to make any major purchases until after you have closed on the home purchase,” advises Lakeway, Texas, real estate broker Shelli McLaughlin.
For most borrowers, using their existing credit card for minor expenses will not affect them, but opening a new loan can absolutely delay closing. Consult with your lender before making any larger-than-usual purchases prior to closing.
DO expect a final credit check before loan closing.
Even though you’ve been pre-approved for your new home loan, your lender will do a final check before issuing your all-clear to close on the home purchase.
“We are required to monitor the credit report and add any new debts and request information from the borrower on any new credit pulls,” says Dumais. “Even if a borrower is well-qualified, it takes a few days to get the new debt added to the credit report and the loan back through underwriting, so closing is almost always delayed if new credit is obtained near the closing date.”
Even the smallest thing can affect a borrower’s debt-to-income ratios and their ability to purchase a home. “Underwriters will often ask for explanations on items that many people would consider insignificant,” notes McLaughlin. “For example, one buyer had a small college loan reset just before closing that affected his ratios, causing the loan not to be approved. Unfortunately, this caused a domino effect for the three other homes, buyers and sellers involved in the contingent offers.
“In another case, a husband wrote a check to his wife for cash and even that was questioned. He had to write a letter explaining the ‘loan’ to his wife,” she says.
Bottom line, the time between loan pre-approval and loan closing should be considered a “quiet period” during which you should make no major changes in employment, residence, debt or anything that could affect your credit. “Buyers need to be cautious not to change any aspect of their lives that would affect their credit and, thus, affect the terms or ability to receive a loan,” advises McLaughlin.