Reign in your spending until you close on your dream home.
When you’re in one of the various phases of the homebuying process, your actions in other areas could determine if you’re successful or not. Other purchases, for example, may seem unrelated but could have a negative impact on your mortgage application. Ashley Moore, community lending manger at Chase Home Lending, says that lenders will consider several factors in evaluating mortgage applications, including credit score, down payment and debt-to income (DTI). And while an increase in your credit score or down payment will be viewed favorably, an increase in your DTI ratio might stop you from being approved. Here’s what you need to know.
Credit Card Purchases and Loans
We get it: life happens. Just because you are buying a home doesn’t mean that you have no other needs. It’s better to avoid big-ticket items during this period. Candice Williams warns that if you use a credit card to make large purchases, your debt-to income ratio will increase, which could put your mortgage preapproval in danger. She says that lenders make decisions based upon a snapshot of the finances on the day you approve your mortgage. Even if you have a loan with a zero percent rate of interest for several months, your purchase may still pose a problem. Mihal Gartenberg, a broker at Coldwell Banker Warburg
in New York says that the minimum monthly payment on credit card debt reduces the monthly amount that can be used to pay for a mortgage. Tanya L. Blanchard is the founder of Madison Chase Capital Advisors. She says that your lender monitors credit during the mortgage application process to make sure you haven’t opened any new credit. “Any new debt will have to be verified, and could possibly cause your loan to be denied if it adversely affects your debt-to-income ratio.”
Debt-to-Income Ratio The debt-to-income ratio (DTI) divides your monthly debt payment by your gross monthly income. This formula is used by lenders to determine whether you are qualified for a loan. Mike Opyd is the president/owner of RE/MAX Next, Chicago. He explains that if a borrower spends a lot of cash, this can cause the debt-to income ratio to be thrown off, which may result in the borrower no longer being able qualify for the property. If you have a lot in debt, it can also affect your ability to qualify for loans – assuming that you are able to qualify at all. “This can result in not being able to look for houses at a price point that would get you all of the things you need and want in a home,” he says.
Cash Purchases
Paying cash for your purchases doesn’t mean that you’ll fly below the lender’s radar. Let’s say that you decide to furnish your new home with cash rather than a credit card. You may be able to avoid the monthly payments that come with putting the furniture on a credit card, but that doesn’t mean you are out of the woods.
Examples of Large Purchases
Large purchases could include anything from buying a car to buying furniture for a new home. Moore says that any major purchase can increase your debt level and/or reduce your cash reserve. “Any major purchases can increase your debt level and/or reduce your cash reserve,” Moore says.
Even
leasing
a car is problematic. She explains that car leases can be compared to renting: you pay each month but your equity does not grow. “Leasing a car will increase your debt level, reduce your cash reserve, and therefore increase your debt-to-income beyond what may be accepted.”
Timeframe
If you want to make a large purchase, does it matter where you are in the homebuying process? It’s better to avoid big purchases as a rule. Moore advises that you should be careful about major purchases, even if you have received pre-approval or prequalification. She says lenders will continue to evaluate your qualifications until the loan is funded.Alvarez agrees and says a major purchase could prevent you from getting financed – even if you already have a commitment. “All commitments are subject to no material changes, and the bank will continue to update documents and records up through the closing.”Incidentally, Alvarez also recommends that you don’t make any major changes in employment – and if you do, it must be disclosed to the lender. “Typically, the day of or before the closing, the bank will reach out to your current employer to verify you are still working there under the same terms.”
Workarounds
There are exceptions to every rule, and we realize that some large purchases may be unavoidable. Gartenberg explains that if you’re planning to renovate the home, she suggests putting down a large deposit with your contractor. And if you’re planning on renovating the home, she says you may want to put down a sizable deposit with your contractor.
“The good news is that buyers can speak with their agent and banker about any big purchases on the horizon – and if a banker recommends holding off, buyers should hold off.”
Gartenberg says most merchants will hold that new car or furniture aside, and after you close on the home, you can proceed with your purchase. The same is true for contractors. They will wait to take a deposit until after the closing date. It won’t appear on your report and credit card companies are more likely to approve your credit limit.