What You Should NOT Do Before Buying a House
There are 3 major parts of a mortgage application: property guidelines, credit qualification, and financial standing. There is plenty advice out there about what you should do to make yourself best qualified for a mortgage. However, what you should avoid doing before buying a house? While property guidelines are out of your control before applying for a mortgage, you can take control your your credit and financial situation.
Tips to Follow Before Buying a House:
CREDIT QUALIFICATION
Do not make inquiries to your credit.
An inquiry on a credit report represents any instance that an individual applies for credit. New inquiries can be a red flag to lenders because they see that you may be living beyond your means and opening too many lines of credit. Many times lenders require you to provide documentation proving no new lines of credit were opened from previous inquiries. Avoid having to provide extra documentation by forgoing any credit inquiries.
Do not increase debt.
Your debt to income ratio is one of the most important factors on your mortgage application. A debt to income ratio is a total of your monthly debt obligations divided by your income. Lenders use this tool to analyze your ability to make your payments each month. When you increase debt before applying for a mortgage, you are making your debt to income ratio higher and can potentially jeopardize a mortgage loan approval.
Do not finance an auto purchase
This goes hand in hand with the tip above. A new car payment that is several hundred dollars will drastically affect your debt to income ratio. If you are serious about becoming a homeowner, hold off on that new car purchase before buying a house.
Do not close out credit accounts.
While this piece of advice may seem to contradict the last two tips, it is actually wise not to close any of your revolving credit accounts. Even if you have paid a revolving account in full, do not close the account. Closing your credit accounts will change your availability ratio and can negatively impact your credit score. Leave your revolving accounts open to reflect a positive payment history and a larger amount of available credit.
Do not make late payments.
The quickest way to drop your credit score is to make a late payment. This can impact the interest rate you qualify for. Additionally, late payments represent financial struggles to a mortgage lender and can jeopardize your entire mortgage application.
FINANCIAL STANDING
Do not drain your savings account.
The amount of money you have in assets is a large factor in your mortgage application. You need to keep your savings account balance up throughout the mortgage application process. You will need your savings for your earnest money deposit, down payment and closing costs. Many lenders also require a certain amount of cash reserves. Resist the urge to spend and save your money for all of the costs associated with buying a home.
Do not transfer between bank accounts.
Most lenders look at 2 months of banking history for any accounts that you have listed on your application. If you make a large transfer or deposit into your account this transaction will need to be traced. Lenders will want to know the source of any large transfers or deposits to verify that it is not a gift or proceeds from another loan. Having to source these deposits or transfers means more documentation to provide. Leave your accounts the way they are to avoid this extra step.
Figuring out the best steps to take before buying a house can be overwhelming. Now you have clear cut advice on what you should avoid doing before applying for a mortgage. Listen to advice listed above and you’ll find yourself with a streamlined home purchase.
