There’s a lot more to qualifying for a mortgage than simply saving up money for a down payment. You need to find a good real estate agent, have money on hand for closing costs, and understand your budget and taxes.
But for as much as there is to do while you’re preparing to buy a home, there are also things you shouldn’t do. Taking any one of these actions can jeopardize your purchase, leaving you disappointed at best, and potentially in a financial bind.
Don’t take on new debt
Mortgage underwriters consider your debt-to-income ratio when evaluating your ability to make monthly payments. If you have too much debt, it can affect how much you can borrow or whether or not you can even get a mortgage. Neil Cannon, a mortgage loan officer at PenFed Credit Union, encourages potential homeowners to start thinking about their debt usage as soon as they start planning to save for a down payment.
“If you want to own a home in two years, but you need to buy a car now, the decision on the car can affect your home purchase in two years,” Cannon explains.
He gives the following example: If you purchase a used car for $6,000 and pay it off within two years, you’ll look much better financially than someone who bought a $50,000 car with 0% financing and still has four years left on their auto loan.
While you should carefully evaluate any decision to take on debt years before purchasing a home, it’s especially vital to do so before closing. Cannon notes that if you prequalify for a mortgage, and then take out a loan for a car or other purchase prior to closing, it can threaten the entire deal.
Don’t switch jobs
Cannon says that before closing, your lender will perform a Verification of Employment — also known as a VOE. The VOE typically occurs up to two weeks before closing, though it can happen as late as hours before you sign on the dotted line.
If you’ve resigned between prequalification and closing, you will not be able to close. If you’ve switched jobs, you must have already reported to work at the time the VOE is completed if you want your new salary to be included.
Generally, though, it’s wise to stay with the same employer for at least two years before closing on your home. This is because compensation like bonuses, overtime, and commissions are variable, and your underwriter will need two years’ worth of documentation if you want this money to be considered as income on your mortgage application.
Cannon also notes that underwriters consider bonuses discretionary, no matter how your employer may pitch them.
“I have had dozens of clients tell me they have a ‘guaranteed bonus,’” says Cannon. “If that is the case, then it is not a bonus, and your employer is torturing the English language.”
This means that your bonus may not be counted as guaranteed income on your mortgage application, even if you feel confident your bonus will come in as it has in years past. If your bonus is particularly large, this could impact how much money you qualify to borrow — or if you qualify to borrow at all.
Don’t move money around
“If we cannot track the source of large deposits, we can’t use the assets for qualifying,” says Cannon.
“I had a recently married couple have a deposit of $14,000 into their savings account. It was all wedding presents, and it was basically all cash. It could not be traced. We could not use it.”
The couple was lucky: Their parents were able to give them a documented gift of $14,000 to make up the difference. Without their parents’ generosity, the couple wouldn’t have qualified, even though they had the money on hand.
If you cannot properly document where your money came from, the best-case scenario would be that your underwriter would not allow the funds to factor into the equation — meaning you can’t count them as an asset toward purchasing or closing on the home.
The worst-case scenario is that the underwriter could assume the money is recently acquired debt. Without documentation, the lender has no way of knowing. This could negatively affect your debt-to-income ratio.
Cannon notes that while it is possible to move money around, it’s wise to do so with guidance from your loan officer — especially during the 60 days prior to filling out your mortgage application all the way through closing.
Don’t sign a contract before getting prequalified
“You always want to be prequalified before you start shopping for a home so you do not make knee-jerk emotional decisions,” says Cannon. Signing a contract puts you under legal obligation. Doing so without being prequalified is a risky move, as you’ll lose any earnest money you put down in good faith at the time you signed the contract should you not qualify. You could also end up with a lawsuit against you, depending on how far the seller is willing to go.
Even if your contract has a financing contingency clause — meaning you have a set amount of days to secure a loan or terminate the contract — it’s still in your best interest to get prequalified. You may have as little as 15 days to secure a loan with the contingency.
If you are unable to, and you do not terminate the contract in writing within the specified time frame, some contracts will still legally obligate you to purchase the home. Because you lack capital, you won’t be able to. If the seller chooses to sue, you could end up in court.
Don’t assume you know as much as your real estate agent
With so much knowledge at their fingertips, it’s easy for today’s homebuyers to feel empowered. There are calculators that tell you how much you should theoretically be able to borrow. You can easily obtain an estimate on a house’s market value versus asking price. You can even research all the first-time homebuyer assistance programs in your area from the comfort of your couch.
But don’t mistake the ease of obtaining information for professional expertise. As a buyer, using a real estate agent costs you nothing. Your agent has likely gone through the home-buying process more than you will in your entire lifetime, and their depth of knowledge — especially of your local market — is something to take advantage of.
“If you are a buyer, you likely need guidance to figure out why this home seems overpriced to you and why that home looks like a great bargain,” says Cannon. “Realtors are compensated fairly, and good Realtors create value for their clients.”