What You Should Avoid in the
Months Before a Home Purchase |
By Corey Senn |
|
Buying a home is a big step and there are some definite no-nos to
avoid so that your home buying experience isn't something that
makes you want to jump off the nearest bridge. While many people
assume we are talking about the 'shopping around and making an
offer' period no-nos, we are actually referring to several
months prior to your home buying experience.
1) First
Off: Don't Blow Your Credit with Additional Debt
One of
the integral decisions for any lending institution is a
borrower's interest rate. This rate is decided upon based on
your credit score, assets and financials, amount of down
payment, as well as numerous other potential factors. Any major
purchase that you make or expense that you incur (car, boat,
wedding, electronic equipment, vacations, etc.) can affect the
amount of debt that you are carrying and can adversely affect
your loan rate. (Since your loan rate can be with you for many
years, it makes sense to really focus in on how to keep this as
low as possible.)
A Note on Credit Card Debt: If you
don't own a home, most of your debt will be from credit cards.
The way a bank looks at credit card debt is as follows: they
take your total credit limit on each card and assesss how much
debt you are carrying. As long as the debt on each card is less
than 50% of the credit limit, a bank does not look unkindly upon
it. However, once your debt exceeds 50% of your credit limit on
each card, your credit is adversely affected.
2) Keep
Your Cash and Assets Where They Are
Before approving your
loan, the lending institution will review your financials (bank
statements -- both checking and savings, 401Ks, retirement
accounts, Stocks, Bonds, Mutual Funds, certificates of deposit,
etc.) to determine how a borrower is going to come up with their
down payment and/or closing costs. Most lending institutions
require 2 to 3 months of statements for any liquid assets that a
borrower holds. This gives the lender a better idea of how much
money the borrower has and insures that they have a good, stable
history on these accounts.
One of the red flags that a
lending institution looks for is an unusual amount of shuffling
of funds between accounts in the months prior to a home
purchase. The reason is that a borrower may want to create the
allusion that they have more assets than they really do by
shuffling funds to generate strong financial statements for each
of their accounts. Over a three month period, however, it is
very difficult to maintain the level of funds for all accounts
by shuffling between accounts.
Many borrowers may be
shuffling funds for completely innocuous reasons (a money
manager left a fund, an account is closed, etc.). In this case,
most banks ask the borrower to show the lending institution the
paper trail or deposits and withdrawals between the accounts to
alleviate any concerns that they may have. This can be a
frustrating experience -- cancelled checks, deposit receipts,
and other seemingly inconsequential data tracking can get rather
tedious.
It is a good idea to try and keep any shuffling
of funds between accounts to a minimum as it increases the
chance for mistakes to be made or may look like you are trying
to run from a difficult situation.
3) Switching
Employment
In most cases, changing jobs will not
adversely affect how a lending institution views your level of
risk for a home loan. This is not the case if, for instance, you
become self employed and cannot show a bank that you have a
steady level of income. As long as your new job commands the
same level of income that your previous one did, most lenders
will see this as a wash -- if not an improvement.
The
point to all of these recommendations is stability. Change opens
borrowers up to silly mistakes among your accounts, the allusion
of trying to hide certain financials, etc. This is the last
thing that a lending institution wants to see when they are
trying to decide whether to loan money to a borrower. So, relax,
don't do anything drastic or out of the ordinary in the months
preceding your home loan. Good luck and happy house hunting! |
|
|
|
|
|
