Finding out you don’t qualify for a mortgage because your finances aren’t in order can be totally devastating. It can also be a burden paying a higher interest rate on a mortgage due to your risk level and credit score.
When you’re looking to buy a house, there are a few things you should avoid if you want to boost your chances of getting your dream home.
There are many first-time homebuyers who, unknowingly, have shot themselves in the foot for certain financial choices which later affected the way lenders viewed their risk level.
It’s hard enough to qualify for a mortgage these days – so make sure to read through all of these tips. Give yourself the most advantages going in!
9 Things You Should Avoid When You Buy a House
1. Take on new debt.
Taking on new debt when buying a house raises red flags.
Firstly, mortgages are loans that can affect your credit score. Taking on a new loan not only lowers your credit score, but also raises questions about your ability to pay back.
Lenders want to make sure that you can fulfill your home mortgage obligations. To decide this, they check your debt-to-income ratio.
If you take on more debt when house hunting, this increases your DTI ratio, which is not a good move as this can increase interest rates on a mortgage.
2. Purchase a car.
Buying a car before a house can affect the amount of house you can afford.
This is because a car is such a large purchase, it will likely increase your expenses. It will also affect your debt-to-income ratio, which is what lenders use to evaluate how much mortgage you are eligible for.
3. Move money between accounts.
The lender will require statements from all of your accounts that include liquid assets while determining your eligibility for a loan.
You’ll have withdrawals in some and deposits in others as you shift money around, especially if they’re substantial sums. The documentation for these will be requested by the lender.
It will be far easier for you to leave the money where it is until after you’ve finished buying a property, unless you want to keep up with all of this paperwork!
4. Switch banks.
This is similar to moving money between accounts.
Changing banks when in the middle of a home buying process creates additional paperwork for you and the lender.
This can slow down the mortgage approval process. It’s always a god idea to stay with your current bank until the mortgage is complete.
5. Become self-employed or change jobs.
When it comes to evaluating your loan application, mortgage lenders seek stability, part of which includes holding steady employment.
Most lenders will accept you for a loan if you have a stable job or at least two years of self-employment. Wait till after you’ve purchased a home to start your own business.
For part-time workers, changing jobs creates unpredictability in the number of hours that you’ll work from one week to the next.
Because of this, the lender can’t determine your gross income to qualify you for a loan.
Stay with your current job until you have the loan, then change.
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6. Apply for a credit card.
Applying for a credit card during the home buying process doesn’t help your cause if you want to facilitate the purchase of your home through a mortgage lender.
Taking out credit card debt may cause the lender to doubt your financial stability, especially if you have an existing card.
The lender may think that you’re not financially secure and need credit to meet your expenses.
7. Make a large purchase.
No doubt, you’ll need furniture and appliances for your new home.
But it is better to wait until after you’ve been approved for a loan. Making large purchases before the deal is sealed can cause the lender to take a second look and peer deeper into your financial situation.
When you’re buying a home, it’s best to stay away from anything that will make it look as though you don’t have your finances under control.
This includes making large purchases that may make you look extravagant.
8. Miss payments.
To maintain a good credit score, you need to make your payments on time!
The higher your credit score, the more likely you are to get approved for a mortgage with a low-interest rate.
Paying bills on time not only shows the lender you’re financially capable, it also gives an insight into your character and money habits.
If you’re having difficulty paying your expenses, now might not be the greatest time to buy a house.
9. Cosign a loan.
When someone asks you to cosign a loan, it’s because they don’t qualify on their own.
They either don’t have enough credit history or have a habit of not paying their debts.
By cosigning, you accept responsibility for their actions in any situation. You are legally accountable if they do not make payments.
When a lender examines your credit report, the loan you cosigned appears as though it were yours.
This implies that your DTI ratio will be impacted. It also shows that you are exposed to a higher degree of default risk. This may lead to higher interest rates on your mortgage.
Looking to buy a home? Read this first!
First Time Home Buyer? Top 5 Tips, 4 Costs to Consider & 4 Questions to Ask First
Key Takeaway
You’ve likely heard plenty about the things you should do before buying a home.
But it’s often the things that should not be done that stall loan approval or make it harder to get a place of your own.
To buy a home in today’s climate can be stressful enough. Don’t add to the strain by complicating your ability to land a loan once you’ve found the property of your dreams!
The common theme that runs through the above-listed tips is: Don’t take on new debt when applying for a loan.
It raises a red flag in the eye of the lender because they need to know that you are financially capable of fulfilling your debt obligation to them.
If they see a mountain of debt around your finances, it raises doubt on your ability to pay. This may lead to higher interest rates or low mortgage amount.
Editor’s note: This article was originally published Dec 6, 2021 and has been updated to improve reader experience.
