Things You Shouldn’t Do When Buying a Home

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With an extensive list of things, you Should do when buying a home, it might seem counterintuitive to focus on what you should not do. However, being aware of the don’ts is just as crucial as knowing the do’s when making one of the biggest financial investments of your life. Understanding what not to do can lead to better financing options and help you secure the home of your dreams.
While some actions, like switching jobs or co-signing a loan, might obviously affect your mortgage approval process, did you know that depositing cash or financing new furniture could also impact your ability to secure a mortgage?
As you prepare your ‘to-do’ list for purchasing a property, ensure your ‘not-to-do’ list is equally accessible. Continue reading to learn about common mistakes to avoid and critical considerations before making your first offer on a property.

 

#1 Don’t Overestimate What You Can Afford

Before beginning your search for the perfect property, it’s essential to get pre-approved for a mortgage. Searching for homes outside your budget is a waste of time and can lead to emotional distress. You might be disappointed if your pre-approval amount is significantly less than you anticipated.
It’s wise to calculate your budget before meeting with a mortgage broker. Brokers typically assess your debt-to-income (DTI) ratio, which involves dividing your monthly debt by your monthly income. Most brokers aim to keep your DTI below 33%. For example, if your monthly debt is $1,500 (including obligations like car payments and student loans but not bills like phone or power), and you earn $6,000 a month, your DTI is 25%. Brokers will calculate your new monthly mortgage to ensure your overall DTI remains below 33%.
Understanding your spending habits is crucial. Use apps like Mint or Itab to track daily purchases, record bills, and calculate monthly savings. Once you account for expenses like taxes and vacations, you’ll better understand where your money goes. Replace your rent or current mortgage payment with a comfortable monthly mortgage estimate, ensuring you’re in the right range when applying for a loan. It’s important to consider your lifestyle; if you enjoy traveling and dining out, ensure you maintain disposable income for these activities.

 

#2 Don’t Get Emotionally Invested

Finding the perfect home can make it hard not to become emotionally attached. Depending on the season and market conditions, there might be competing offers, or issues such as a problematic home inspection could cause your offer to fall through. Approach the home-buying process with high intention but low attachment to maintain your spirits during the search.

 

#3 Don’t Make Any Large Purchases

As you contemplate purchasing a home, avoid making large purchases such as a new car, furniture set, or home entertainment system. Banks will scrutinize your financial history, including recent activities. Your mortgage pre-approval is based on the money you had in your account and your debt level at the time of application. A large purchase reducing your account balance could decrease the amount the bank is willing to lend.
While it may be tempting to furnish a new property or imagine your new car in the driveway, wait until you close on the property and confirm your financial stability.

 

#4 Don’t Deposit or Withdraw Large Amounts of Cash

Avoid depositing or withdrawing large sums of cash. Lenders may flag large deposits as potential loans from banks or other lenders, which could affect your debt-to-income ratio. If a family member gifts you part of your down payment, they may need to sign a letter confirming it as a gift, not a loan. If repayment is required, it will be added to your monthly debt.
If you receive a large sum from selling an asset or repaid debts, be prepared to prove the source’s legitimacy. Most lenders review up to 60 days of bank statements, so organize documentation before applying for a mortgage and account for any significant transactions.

 

#5 Don’t Apply for More Credit

Your mortgage approval largely depends on your savings and income. Any additional debt could reduce your approved loan amount, so avoid applying for new credit lines.

 

#6 Don’t Co-Sign a Loan

While co-signing a loan for a friend or family member may seem harmless, it could jeopardize your mortgage approval. If they default, you become responsible for their payments, impacting your ability to manage your own mortgage. Protect your financial interests by avoiding co-signing commitments.

 

#7 Don’t Finance New Purchases

New home purchases often come with the desire for new appliances, furniture, or electronics. However, financing items before or during your mortgage application process can be detrimental. Focus on securing the property first, ensuring you can afford it before making additional purchases.

 

#8 Don’t Change Jobs, Leave a Job, or Start a Business

Your financial stability is a key factor for mortgage lenders. Quitting, switching jobs, or starting a new business can increase your perceived risk to lenders. If you’re considering a career change or business venture, wait until after the property is secured. Naturally, avoid getting fired during this critical period.

 

#9 Don’t Miss Loan Payments

If you have existing loans, it’s crucial to maintain timely payments. A good credit score suggests reliability, but even an honest mistake, like a missed payment due to travel or illness, can significantly impact your score. A 30-day missed payment could lower your credit by more than 100 points. Stay vigilant with your finances, especially when your credit score affects your mortgage pre-approval.

 

#10 Don’t Switch Banks

Switching banks may seem minor, but it can complicate your mortgage pre-approval process. Banks often require at least 60 days of transaction history and account balances. Stick with your current bank to avoid unnecessary complications.

Conclusion

The list of don’ts may be longer than expected, but understanding these pitfalls can help you avoid issues affecting your decision-making and financing ability when purchasing a new home. By organizing your finances and documents before seeking pre-approval, and securing pre-approval before house hunting, you’ll be well-prepared. Once pre-approved, adhere to these guidelines to maintain your eligibility through closing.
Avoid large purchases, remain with your current bank, and stay on top of your bills. Mortgage pre-approvals can be stressful and time-consuming, but the effort is worthwhile when you finally hold the keys to your dream home!