Purchasing a home is not merely a transaction; it’s a pivotal moment that marks the beginning of a new chapter in life. While it’s natural to be swept up in the anticipation of creating a new personal space, the period between your mortgage application and the actual purchase is crucial – and it demands care and attention. To navigate this critical phase successfully, here’s a quick guide to ensure you’re well-prepared for the financial nuances of buying a home.
Be careful when making cash deposits
Understand that lenders are particularly vigilant about the origins of your funds. Unexplained cash can raise red flags during the mortgage process, as lenders are obliged to report large deposits as part of anti-money laundering regulations. To avoid any complications, if you have cash deposits to make, talk to your mortgage lender about the best way to go about it. They will likely give you advice about retaining withdrawal and deposit slips or perhaps require you do provide documentation about the source of the cash. Just be upfront with your lender if you find yourself in this situation.
Hold off on all major purchases
The temptation to purchase new furniture or upgrade your car in anticipation of a new home is strong. But it’s imperative that you just DON’T DO IT! Furniture and cars are significant expenditures and it can alter your lender’s perception of your financial health. A new loan or credit obligation can result in substantial changes to your debt-to-income ratio, potentially disqualifying you from securing a mortgage. Even if you still qualify for the loan, these purchases could lead to a higher interest rate or you may need to make a larger down payment. It’s not worth the risk, so wait until after your loan closes to make those big purchases.
Avoid cosigning loans
While it’s sometimes hard to say “no” and even if you think helping a friend or family member by cosigning a loan is harmless, it can have substantial repercussions on your mortgage process. When you cosign a loan, it becomes your debt, too, and lenders treat it that way. A cosigned loan adds to your debt load and could potentially push your debt-to-income ratio beyond acceptable limits. A cosigned loan is not just a signature; it’s a commitment that lenders take seriously.
Keep your banking landscape stable
Remember that your lender needs to be able to source your funds. If you frequently switch your money between bank accounts, this can obscure the origin of funds and disrupt the lender’s ability to track your finances effectively. Stability in your banking transactions is key. Should you need to transfer funds for any reason, such as consolidating your accounts for a down payment, ask your loan officer for guidance. They should direct you on the correct protocol to ensure transparency and traceability.
Hold off on applying for new lines of credit
After you apply for a mortgage and before you close on home, you should lay low financially. That is the time to maintain a quiet financial profile. If you apply for new credit, you credit score could take a minor, temporary hit. But more importantly, it can change the way lenders evaluate your reliability as a borrower. A lower score can lead to less favorable loan conditions, which means it will cost you more to buy the same house. The easiest way to avoid this is to hold off on any credit-based transactions until after closing day.
Do not close any credit accounts
Now this one might seem counterintuitive, but having access to credit is actually beneficial. You might think that closing unused credit accounts shows financially responsibility, but it could actually hurt how lenders view your credit worthiness. Part of your credit score calculation is based on the amount of credit you’re using compared to the amount you have available – your credit utilization rate. If you close accounts, this reduces the amount of available credit you have, and that drives up your credit utilization rate, which means a lower credit score. Your credit score is also based on the average age of your credit accounts, so you should keep those credit accounts open – especially the older ones.
Just be upfront and communicate with your lender
Ultimately, be transparent with your mortgage lender and keep them informed. If you anticipate any changes in your job, income, or credit status, or if you’re contemplating any large financial decisions, your lender should be the first to know. This allows them to provide tailored advice and perhaps adjust your loan strategy accordingly.
When you’re in the market for a new home, it’s essential to manage your finances with added caution. Every financial move you make is magnified under the lender’s microscope. By avoiding any actions that could be interpreted as financial instability, and by consulting with your mortgage professional about every significant financial decision, you ensure the smoothest path toward securing your home loan. Patience and prudence during this time are investments that pay off when you finally receive the keys to your new home.