10 Things You Shouldn't Do When Buying a Home
The internet is awash in information about what you should do when you’re preparing to buy a house. However, few discuss what you shouldn’t do. Often, the actions you should be avoiding are just as important, but less obvious.
For example, it’s well known you should stay in your current job when you’re preparing to buy a house, but did you know a large withdrawal from into your bank account could have a profound impact on your ability to get a mortgage?
Here’s a quick guide to this and other such don'ts to keep in mind when you’re readying to purchase property.
#1 Don’t Think Outside Your Budget
Many are tempted to start looking at properties right away, dreaming of what could be, but before you run yourself through that emotional rollercoaster, it’s crucial that you get pre-approved. After all, you don’t want to find the perfect new home, only to find out it’s far outside of your financial capabilities.
You may want to run the numbers yourself before visiting a mortgage broker for pre-approval. That way you can have a rough estimate to work from.
Most mortgage brokers will perform a debt to loan ratio (DTI) calculation. To make this calculation, take your monthly debt and divide it by your monthly income. This monthly debt includes debt obligations such as car payments or student loans, but doesn’t include bills, such as cell or power bills. The goal is normally to keep your total debt to loan ratio below 33%.
For example, if you pay $1,000 a month in debts, and your monthly income is $5,000, your DTI is 20%. Your mortgage broker will run calculations with the result that your mortgage payments won’t push your DTI over 33%.
However, budgeting isn’t just about the absolute upper limit of what you can afford. You should also account for other facets of your lifestyle, such as travel, dining, and so on. It's important to budget for disposable income and other uses of your money before you decide how much you are willing to spend on a mortgage. Apps such as Mint can help you keep track of your daily purchases and bills. Conversely, you can do some good old fashioned budgeting with spreadsheets to get a sense of how much of your daily budget is sensible to apportion to a mortgage.
#2 Don’t Become Attached
The housing market is fickle and ever-changing. Even if you make an offer on a house, someone else’s offer could be accepted instead. A housing inspection could also fall through, or the seller could reject your offer for some other reason. Thus, it's possible to lose the house you were hoping for and have to settle for something else.
Go into home buying with an open mind and remember to stay adaptable. This is the best way to keep yourself from getting discouraged during what can be a long and varied adventure.
#3 Don’t Make Large Purchases
During the pre-approval process, banks will take a look at your financial history and recent activity, including how much money you have in your bank account. The less money there is in your bank account, and the more you owe, the less a bank will lend you for your mortgage.
As such, don't make any big purchases until the homebuying process is settled. This will maximize your house-buying capability. Though it might be tempting to envision what new furniture you might get, or what car you’ll drive home in every night, think how much better it would be to bring all these dreams into the perfect house for you, and hold off on those purchases.
#4 Don’t Deposit Large Amounts of Money into Your Bank
This may seem counterintuitive, because it’s tempting to think “Well, more money in the bank is good, right?” However, the bank financing you will be on the watch for large deposits that could be loans from another bank or other lender. Remember, the bank is assessing your debt to loan ratio to see how much you can afford for a mortgage. For this reason, banks are interested in large influxes of cash.
If a parent or family member gifts you with money for the down payment, they must sign a letter stating the money was a gift and you won’t be paying them back. Again, if you do have to pay them back, then this will affect your debt to loan ratio.
Similarly, you’ll have to prove the legitimacy of any other influx of cash, such as from a car sale or someone paying you back for a debt they owed.
So, pay attention to your balance. Most banks will look at 60 days worth of bank statements. Having the proper documentation will prevent hitches in the lending process.
#5 Don’t Apply For More Credit
This comes back to your debt to loan ratio. If you owe more debts, the amount you’re approved for by the bank will decrease, diminishing your buying capacity. So, when you’re preparing to enter the homebuying process, it’s best to avoid applying for more credit.
#6 Don’t Co-Sign Someone Else’s Loan
Of course, we all want to help our friends and family, and co-signing a mortgage can be a way to do this. However, if something goes wrong, and the other party defaults on their mortgage, you become responsible for the payments. This could drastically affect your ability to get your own mortgage, impacting your debt to loan ratio and how much money you have in the bank. So, act carefully and remember to protect your financial interests.
#7 Don’t Finance Anything
It’s tempting to envision your home with new appliances, furniture, even a new TV. But entering into a financing program for any of these prior to buying the house is a mistake. You don’t want to negatively impact your loan to debt ratio, which would diminish your buying capacity.
Remember: the first order of business is to actually be able to afford and buy the home. Furnishing comes second.
#8 Don’t Make Any Big Career Changes
Financial stability is a crucial determinant in getting a mortgage. It’s the whole reason lenders are so interested in your bank accounts, your debt to loan ratio, and so on. Your financial stability can be thrown into question with a sudden career change. Quitting a job, getting fired, changing your job, or starting a company are bad ideas during the mortgage process. If you’re planning on a big career change, you’ll want to hold off until after you’ve closed on a property.
#9 Don’t Miss Loan Payments
Good credit is a crucial part of the homebuying process. Lenders will look at your credit when determining how much they are willing to lend you. So, pay extra special attention to maintaining your good credit score when preparing to buy a house.
Even just a thirty day missed payment can drop your credit by more than 100 points. That’s enough to make a difference to your pre-approval, so stay attentive to your loans, bills, and so on!
#10 Don’t Switch Banks
Banks are always trying to draw in new clientele with freebies, from televisions to cash back. The lead up to your pre-approval would be the worst time to give into such a temptation. You need to be able to provide at least 60 days of transactions and bank account balances for pre-approval, and switching banks will only make this more complicated. As such, it’s wise to wait on such offers – after all, there will always be more!
Now you know what to avoid when preparing to buy a house. If you follow these “don’ts," the pre-approval and closing processes will be much simpler than they would’ve been if you’d been financing furniture, buying cars, and switching bank accounts willy nilly. It might be hard to adhere to all these behaviors, but you’ll be thanking yourself when you move into your dream home!