When you officially applied for a mortgage, you’ll have to be cautious about your spending more than ever until you close on the home. People think that once they are in the clear on a credit check or when they receive a commitment letter or pre-approval, they are guaranteed a mortgage. That is not true. You can be denied at any time.
Your lender continues to evaluate your income, credit score, and assets until the bank ‘funds.’ This means, your lender will pull a fresh credit report right before closing. Any significant changes in your report can impede your loan approval.
Why No Big Purchase Rule?
Due to high foreclosure rates throughout the nation, lenders have determined that liabilities incurred up to closing are evaluated in qualifying the borrower for the loan. Any credit splurges during the mortgage process is a big no-no. The reason for the no big purchase rule is due to two things: your credit score and your debt-to-income ratio.
Certain things are dependent on your credit score such as your interest rate. Opening a new credit account or obtaining new loans can drop your credit score.
The bigger issue connected with big purchases is your debt-to-income ratio. The DTI will generally be the deciding factor on how large of a loan you can qualify for. The current government guideline dictates that your DTI must be no more than 45% of your gross monthly income. If you have $1,800 of monthly debt and $4,000 of gross income you would have a debt to income ratio of 45 percent ($1,800/$4,000 = 45%). You don’t want to suddenly add $200 a month to your rotating debt because you decided to buy furniture early.
What is Considered as a Big Purchase?
The answer to this depends on your financial situation. A big purchase is anything that could affect your debt-to-income ratio. The question would be, ‘does a purchase materially affect your situation in some way?’ ‘Does it increase your debt level or reduce your cash reserves?’ If the answer to these questions is yes, then you should hold off that big purchase until you close on the home.
If you are not sure how a big purchase will affect your loan approval, don’t hesitate to speak to your loan officer beforehand. He or she is the best person to advise whether the purchase will have negative effect on your loan approval.
Can You Use Cash to Pay for Big Purchases?
Paying cash for big purchases during the mortgage process is a logical option. However, you have to be cautious too, as it can also put your approval at risk. You can pay cash as long as you have enough cash to cover for your down payment, closing costs, and cash reserve when the closing time comes.
During this critical time, it’s important that nothing you do makes your lender question your ability to pay the loan. Making big purchases is just one of the big no-nos, there are also other factors that can deter your approval. To make sure you get that loan approval, here’s a list of things you should avoid doing during the mortgage process.
- Do not quit and get a new job at a new company.
- Do not forget to pay your bills on all your existing accounts.
- Do not transfer large sums of money between accounts, keep your funds in stable in the same accounts;
- Do not apply for new credit cards, and keep all existing credit cards open.
- Do not max out your existing credit cards.
- Do not buy a new car or do a trade-in.
- Do not make undocumented deposits into your bank account.
- Do not make any changes without first consulting your lender.