Nightmare Before Closing: What Not to Do When Buying a Home

If you've seen the movie, you know what we're talking about--despite the best intentions, without proper guidance, our best-laid plans can go seriously awry. While some people have to learn these rules the hard way, we're here to provide guidance to make it easy for everyone else. If you're under contract, about to buy a home, or planning to purchase a property soon, there are things you can do that could end up delaying the closing process. Below, we share seven tips on what not to do when buying a home so you can set yourself up for home-buying success.

What Not to Do When Buying a Home--#1: Don't Make a Large Purchase Using Debt

This one tops the list of what not to do when buying a home for a reason--for the most part, you have the power to plan ahead to determine when the best time would be for you to make a large purchase. If you're planning to buy a house in the near future, it's a good idea to start planning out which big purchases may need to occur before versus after the purchase is complete.

In addition, you've probably been scrimping, saving, and watching your credit score with an eagle's eye--however, as fun as a celebratory shopping trip sounds, there are still financial activities that are off-limits until the closing process is complete. While new appliances and stylish furniture pieces may look awesome in your new space, you should wait to buy them until after the closing process, especially if you're planning to purchase them on a credit card. If you do, it could change the conditions of your approval. In addition to appliances and furniture, here are some other big-ticket items you may want to avoid buying before you're under contract:

• Cars, trucks, motorcycles, and boats
• Vacations
• Electronics
• Jewelry

What Not to Do When Buying a Home--#2: Don't Quit Your Job or Change Careers

Lenders really want to see stability in your career history, so if you're thinking you may want to purchase soon, it's best not to make any sudden changes. Switching jobs or changing careers before you apply for a mortgage may not compromise your approval at all*--however, in a lot of cases, changing jobs during the mortgage application process will throw a wrench in the process.

*For example, if you've been employed at one company for several years, but now a competing company in the same industry is recruiting you for 20 percent higher pay, your lender should view the additional income as beneficial. This job change should not impact your mortgage application negatively.

What Not to Do When Buying a Home--#3: Don't Forget to Make Your Payments on Time

If you have a couple of late payments hit your credit report before the closing process is complete, it may set you back on your homebuying journey. Payment history comprises about a third of your credit score. However, if you do miss a payment, don't panic--overall good credit history can outweigh one or two occasions of a late credit card payment.

Other serious events that may impact the closing process:

• Bankruptcies
• Lawsuits
• Wage attachments

Credit utilization accounts for about 30 percent of your credit score. In general, it's a good habit to try not to use more than 30% of your available credit. This means if you have $10,000 in available credit, your outstanding balances should not go over $3,000. If you make a big purchase that significantly increases your credit utilization, and don't want to see your credit score dip, your best bet is to pay it off as soon as possible.

What Not to Do When Buying a Home--#4: Don't Apply for Any New Credit

In addition to sidestepping big purchases on your credit cards, it's important to refrain from opening new lines of credit; your credit score will take a hit when you apply for the new card and it will invalidate your previous score. In the worst-case scenario, this may cause your lender to deny your mortgage application, or they could offer you a home loan with a higher interest rate.

However, it is a common misconception that multiple credit pulls can drop a borrower's credit score during the home loan application process. In fact, a borrower's score will not drop when a lender pulls their credit more than once in a two-week period. So, why is that?

Credit card debts tend to increase over time, which means the lender must take on more risk, which means a lower credit score--in contrast, mortgage debt will eventually be reduced to $0, so mortgage loan checks don't have as much weight.

What Not to Do When Buying a Home--#5: Don't Transfer or Deposit Large Sums of Money

When you apply for a mortgage, expect every nook and cranny of your finances to be scrutinized--from your credit score to what seems to you like innocuous financial activities in your bank account--before the closing process is complete.

Your lender will ask for the last two to three months of savings and checking account statements, and if you've recently deposited or transferred a large sum of money, it may jeopardize your chances of being approved if you cannot prove its source.

Why are lenders concerned about large deposits or transfers?

In and of themselves, your deposits and transfers aren't bad--it's the documentation that the underwriter is concerned about. If you can't provide documentation, the underwriter may assume that you opened a loan or took out a cash advance and deposited it into your account.

What Not to Do When Buying a Home--#6: Don't Assume You Need a 20% Down Payment

It might come as a surprise, but did you know you don't actually need to put down 20 percent on your home? If you're looking to buy a house, but don't have that much cash available, there are several great options.

If you opt for a conventional loan and put down less than 20 percent, you will be required to get private mortgage insurance (PMI). Your rate will vary based on the size of your down payment and your current credit score.

Some loans require you to pay PMI for the life of the loan, such as an FHA loan; However, for many other types of mortgages, you can ask your lender to cancel your PMI once you've built 20 percent equity in your home.

What are the pros and cons of a 20% down payment?

• If you put down at least 20 percent, you won't have to purchase PMI and you will save on interest over the life of your mortgage.
• Putting down 20 percent isn't a good idea if it will leave you in a compromised financial spot, or if it takes away from your emergency fund.
• If rates are low when you're ready to purchase, a smaller down payment may help you take advantage of economic conditions.

Your neighborhood Mortgage Advisor is available to help you understand all of the different down payment options available, and more--they're also here to answer more nuanced questions you may have about what not to do when buying a home and how to select the best loan for your life and long-term goals.

What Not to Do When Buying a Home--#7: Don't Shop for a Home Without Getting Pre-Approved

In today's competitive housing market, it's easy to fall in love with a space, only to have it swept out from under your feet. If you're serious about buying a house, home sellers and real estate agents want to know that you're pre-approved for the dollar amount needed and are ready to move forward quickly to get under contract.

There's one other compelling reason to get pre-approved before shopping around--often, you don't know how much house you can afford until after you've gone through the pre-approval process with your lender.

What Not to Do When Buying a Home--#8: Don't Co-Sign a Loan

When you co-sign a loan, you're agreeing to take on the financial responsibility of the primary borrower's loan if they end up not being able to make their payments. One common example is a parent who wants to help their kid qualify for a mortgage. If you decide to co-sign on a loan but you're about to purchase a home, it may hamper your chances of getting a mortgage, as the lender may not believe that you will be able to pay those potential debts along with the principal and interest on your loan.

"This Year, Homeownership Will Be Ours!"

That's probably not word-for-word what Jack Skellington said .... but you get the gist. If you're ready to buy a home, or if you want to talk more about what not to do when buying a home, your local Mortgage Advisor has the knowledge and resources you need to take a confident next step. Reach out today or visit our blog for additional resources.