Four Important Financial Lessons When Trying to Buy a Home
Buying a home is an exciting prospect. There is more to it though than improving your credit score, saving for a down payment, finding the perfect property, and making a competitive offer. Sometimes, we are our own worst enemies when it comes to this exciting time. To help you protect your dream, we share the following four tidbits of financial wisdom that align with common mistakes prospective buyers make that can jeopardize your ability to make your homeownership dream a reality.
Maintain Job Consistency - According to Fanny Mae, “The stable and reliable flow of income is a key consideration in mortgage loan underwriting.”1 If you quit your job or change jobs, your mortgage lender may not be able to use your income to qualify you for a loan because that income is considered probationary. Dependent on the value of your savings as well as your income, many mortgage lenders are going to require a steady work history of at least three to six months in the same position or that you have completed the probationary period at your job if they have one.
Pay Down Your Credit Card Balance - Now is NOT the time to start making purchases on credit. In fact, it is best if you can pay down or even pay off your credit cards. It is especially important that you at least make your monthly payments in a timely fashion. Do not get overly excited by buying lots of things on credit for the new home. According to Experian, lenders like to see the amount you have charged each month on all your cards total to be less than 30% of your available credit.2 For example, if you have $10,000 in total credit card limits, you should try to make sure you don’t charge more than $3,000 a month in total. If you can keep that percentage to less than 10% over time, it can help improve your credit score.
No BIG Purchases - The ideal scenario when you buy a home is to have a low debt to income ratio, as well as a solid savings account and good credit score. However, even if your credit history is not perfect, minimizing your monthly financial obligations makes you an attractive client because you are lowering your risk score for possibly getting over-extended and defaulting on your home loan. Hence, now is NOT the time to reduce your savings with a large purchase or even worse, taking out a loan to buy a vehicle, vacation home, or recreational vehicle. Wait until AFTER your home loan closes to consider any large purchases, even if you have plenty of money to handle the home loan and a new toy.
- Don’t Commit to Financially Supporting Others - Sometimes people in our lives need financial help and reach out asking for support. However, when co-signing with a friend or family member for a loan you are committing to take on the responsibility of the loan payments along with the other person. This is a financial liability that changes your income to debt ratio. Also, if the other person defaults on their loan and you do not take over the payments, it will negatively impact your credit score. Hence, when you are trying to buy your own home, your mortgage lender will likely advise you to not co-sign on any loans.
We love helping buyers make their homeownership dreams come true. It is heartbreaking when a transaction falls through because a buyer makes one of these avoidable mistakes while they are in the process of financing their new home. If you have questions about saving for a home or what you should or shouldn’t do in the 6 to 12-months leading up to a new home purchase, we’d be happy to share the names of some wonderful mortgage brokers who are a great resource for developing a successful home financing plan.
1. Fannie Mae. August 5, 2020. Selling Guide. Accessed September 1, 2020. https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-3-Income-Assessment/Section-B3-3-1-Employment-and-Other-Sources-of-Income/1032992031/B3-3-1-01-General-Income-Information-08-07-2019.htm?touchpoint=Guide.
2. Experian. December 18, 2018. Isla Mangla. How to Improve Your Credit Score. Accessed September 2, 2020. https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/improve-credit-score/
Written by Marci L. Hardy, PhD