When you buy a home, your finances and credit should be in pristine condition so that you can get the best interest rate on your loan and deal on your home. But a lot of buyers get so excited at the possibilities that open up with a better-than-ever credit score that they make some generic mistakes -- and sometimes they just don't know the potential consequences of a seemingly innocuous move like changing bank accounts.
If you're getting ready to buy a house, keep these common buyer mistakes in mind and do your best to avoid them before the keys to your new home are safely in your hands.
Don't buy a car or another big-ticket item
The lenders on your home loan are going to look at your debt-to-income ratio, which tells them how many other monetary obligations you already have compared to how much money you earn.
Needless to say, a purchase like a car, a boat, or even a nice piece of furniture can adversely affect your debt-to-income ratio. So think twice before you decide to use your awesome credit score to buy something besides a house.
In fact: Don't spend a lot on credit, period
It bears repeating: Think twice before you decide to use your awesome credit score to buy something besides a house. Lenders are going to look very carefully at your credit history and current spending habits, and racking up a bunch of debt before you try to buy a house is going to be a red flag for them.
Don't apply for a new credit card
Lenders are looking for stability in your financial history and credit report, so it's smart to build up your credit by having a few open accounts with high credit lines that have been open for a long time. Applying frequently for new lines of credit is a signal to lenders that you might not be able to manage your money very well -- another red flag.
Don't close any open accounts
One factor that affects your credit score is the length of time that most of your accounts have been open. The longer, the better -- so your goal should be to pay off your debt and keep credit lines open.
Don't move money between accounts
Lenders are going to want to see several months' worth of bank statements, and they'll want to see that your down payment has been in your account for a stretch. Do your best to keep savings dollars in savings and not switch them over to your checking account; when lenders see a lot of movement in that direction, it's another signal to them that you could be a riskier loan recipient.
Don't neglect to pay your bills on time
Late bills get added to your credit report and have a big effect on your score, so if you're not already diligent about paying all of your bills on time, it's time to start! Many accounts let you switch to auto-pay, which is a reminder-free way to make sure that you're not late with anything.
Don't switch jobs
If it's at all possible, do your best to keep your employment status steady while you're trying to secure a mortgage loan. Obviously, lenders want to see that you have the ability to repay the loan, and one way they assess that ability is to look at your employment history. Changing jobs in the past won't necessarily ding you, but switching jobs in the middle of home-shopping could.
Don't co-sign for a loan
This goes back to the debt-to-income ratio that lenders will be considering before they offer you a loan. When you co-sign on a loan for a car, a house, or another big (or small!) item, that debt is considered yours to pay off if the co-signer fails to make his or her own payments. That means it will be added to the debt side of the ratio -- not ideal!
Don't change banks
Because lenders are going to want to see several months' of bank statements, changing banks makes that process a little more confusing for them when assessing your ability to repay the loan. And again, they're looking for stability and consistency in your finances, so changing banks could indicate that perhaps some of that is lacking in your profile.
Don't neglect to set a home shopping budget
Just financially speaking, buying a home can feel very confusing because there are so many different factors to consider, and it's hard to know where to start. How do you know how much you can afford?
There are some mortgage calculators on brokerage and real estate portal websites that try to help you with this, but look carefully at them and read the fine print before you assume that this would be your mortgage payment, guaranteed.
A mortgage payment includes not only the listing cost of the house, the property taxes you'd pay on it, and the price of homeowners' insurance, but also the interest on the mortgage loan that you're hoping to take out, and possibly mortgage insurance if your down payment will be less than 20%. Many of those online calculators also assume you're putting 20% down (although some will let you adjust that amount).
So make sure you're considering all those factors while you're preparing to buy. It will help you determine how much to save for your down payment and give you a much clearer picture of whether you can afford this specific house or if that one's a better option when the time comes.
Don't over-extend yourself
Most financial experts advise that you spend no more than one-third of your household income on housing. That's not realistic in every market in the country, but it's a good rule of thumb to bear in mind when you're thinking about your ideal price range.
It's tempting to look at the very top of your price range when you're shopping for a home, but really think about what that's going to mean for your month-to-month financial viability. It might help to start talking to a mortgage broker about your options and get his or her opinion on the type of loan that would be best for you and the price range that makes the most sense.
Don't get emotional about the process
It's very normal to feel frustrated during the tedious process of securing a mortgage loan. You might feel exasperated by all the documents you're being asked to submit, or angry with your past self for making so many silly financial decisions.
House-hunting can be an emotional business, between rejected offers and searches that never seem to end. You'll get through it much more smoothly if you try not to let it all get to you, starting with the loan process.
Don't ignore your lender's requests
As alluded to above, you're going to be asked to submit a lot of documents so that lenders can decide how they feel about lending to you. Your mortgage broker is going to ask for bank statements, tax records, pay stubs, and more, so be prepared to give them what they need. The longer it takes to get the documents from you to them, the longer everything is going to take!
Don't forget about closing costs
The title company is going to want to get paid for facilitating the closing, and there are other expenses involved, too -- appraisal and inspection fees, to start with. So when you're budgeting, make sure you remember that closing costs are a thing, and if the market is in your favor, you might even ask your real estate agent to negotiate to split those with the seller.
Don't put your whole down payment in the bank at once
The lender wants to see that you're able to save up a chunk of money over time and not skim off the top at all -- and one more red flag for lenders is when you put your whole down payment in the bank at once. If it's a gift from family or an inheritance, then you may need to explain where it came from, but the best-case scenario for your loan is to save it up over time.
Don't lie about your income or assets
Some buyers are tempted to pad or hide their assets so that they can get a better deal -- but this is a mistake. If the lender discovers it (and it's very possible that the lender will discover it), then you're back to square one ... but this time with a lender who isn't entirely sure that you're trustworthy.
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Meet Robert
Father, Husband, House Flipper, workout enthusiast, Boston-based real estate expert, and Broker & Founder of Boston Trust Realty Group. When I’m not helping local residents sell or buy their dream homes, I’m spending time with my wife and kids, exploring Boston’s bustling and ever-changing neighborhoods!
