By: Daniel Goldstein / Realtor.com
The loan is approved, the contract is signed, the title is clean, the closing date is set, and everything seems on track to get that home.
And then some people do the unthinkable that costs them their dream home.
“I’ve had clients call me and say they’ve quit their job, or bought a new car,” just before close, says Mark Livingstone, a mortgage broker with Cornerstone First Financial in Washington, D.C. “All I can do is say, “What were you thinking? I’ve seen a number of deals fall through that way.”
It’s tempting to splurge just before you buy a home. After all, you’ve probably got big-ticket items to buy like a washer and dryer, or a lawn mower, or new furniture, or bedding. And you’ve probably paid down your other credit cards and paid off car loans and otherwise cleaned up anything bad on your credit ahead of applying for a mortgage. Now there’s a store offering you a $10,000 line of credit for furniture with no payments for a year so you can fill your new house?
Don’t do it. At least, not before you close.
“Banks are going to question almost any meaningful transaction you make while you’re applying for a mortgage,” says Douglas Boneparth, a financial planner in New York City. “So, until you close and the keys are in your hands, you are under the magnifying glass,” he says.
There’s one thing most people don’t understand in the home-purchasing process: Their credit is monitored, right up to the day they sign the contract says Tom Wind, executive vice president of home lending for EverBank in Jacksonville, Fla. “When people think they’re approved [they also think] they’re done,” he says. “They’re not done until the loan closes,” he said.
Take, for example, the furniture store line of credit. It doesn’t matter if you aren’t making payments yet on the $10,000 of furniture you just bought, Wind says, because the bank assumes you’ll be making a monthly payment straight from the start, which will likely throw off your debt-to-income ratio. “All that installment debt goes on your credit before you make a payment,” he says. “Even if we find that there’s a deferment, we have to take that future payment into account.” (For the most part, most lenders say your total debt-to-income ratio can be no more than 43%, and prefer no more than 28% for your house payment portion.)
If you need new furniture to fill your house, consider renting for a few months. There’s often no hard credit check and given that your store-bought furniture will likely take several weeks or months to be delivered, and it can be a more cost-effective option.
Car leases can also trip up potential home buyers, because the bank treats the lease payments like any other debt payment and the lease includes a hard credit check, says Sabine Schoenberg, a former realtor in Greenwich, Conn. who now runs SabinesHome.com, a real estate advice and home design website. Leases often require more cash at signing, which could be used for paying down credit cards or increasing your down payment. “Anything that might gobble up cash is money you should have in your account,” she says.
Even if you avoid the temptation to splurge before the close, another frequent hiccup occurs when home buyers switch jobs at the last minute, Wind says. “People think in their mind it doesn’t make a difference if it’s company A or company B or if I make $100,000 here, or $100,000 there, but the difference is we still have to validate all if it,” Wind said. “The risk you’re going to have is we’re going to have to call the old company if we find out you’re not there. It’s going to be an issue,” he said.
Wind says even if you leave a job for more money or even the same money, it may be difficult to get pay stubs at the last minute. “If you’re not talking to your lender it could delay your closing or put your deposit at risk,” he says.
Of course, scraping up the cash to ensure you can close is one of the hardest parts of the real estate transaction. Many buyers opt to borrow from their 401(k) accounts or withdraw from their IRAs. What you shouldn’t do, says Boneparth, is use cash advances from your credit cards to bring more cash to the table. Naturally you run up more debt, and you’re going to pay more interest on the cash advance (usually double digits and sometimes even higher than 20%).
It’s also important to let your lender know if you’re getting large deposits, such as gifts from family members or withdrawals from your IRA to help with the down payment, Wind adds. “Those are very easy things to explain, but we need to know where the cash is coming from and clearly document that it’s not a loan,” he says.