Things Not to Do Before Buying a Home

No Major Purchases on Credit

If you are applying or even approved for a mortgage loan, you do not want to create any kind of new debt until you have closed escrow on your home purchase. Do not apply for any new credit or credit cards. Do not drive up your outstanding debt. This applies to any major purchases including such appliances, automobiles, electronic equipment, furniture, jewelry, vacations, etc.

Do Not Buy a Car

During a loan interview, the loan officer will ask you about your income, savings, and debts. Often, (s)he will inform you that having a car payment may put you out of reach from qualifying for a home loan.

Debt-to-Income Ratios and Car Payments

To determine your ability to qualify for a mortgage loan, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is simply the percentage of your gross monthly income that you spend on debt. This would consist of: monthly housing costs, including principal, interest, taxes, insurance, and homeowner's association fees (if any); and monthly consumer debt, including credit cards, student loans, installment debt, and car payments.

How a New Car Payment Reduces Your Purchase Price

Let's say your monthly income is $5000; and you have a car payment of $400. Estimating current interest rates (approximately 8% on a thirty-year fixed rate loan), you would qualify for approximately $55,000 less than if you did not have that car payment.

If you still think you can afford the car payment, try to keep in mind that mortgage companies approve your mortgage based on their guidelines, not yours. So, first get pre-approved by a lender. After your loan has funded (at the close of escrow, then pursue your automobile purchase.

Don't Move Money Around

One of the things lenders are concerned about when reviewing your loan package is the source of funds for your down payment and closing costs. Expect to be asked to provide statements for the last few months on any of your liquid assets. This includes: checking accounts, savings accounts, certificates of deposit, mutual funds, money market funds, stock statements, your company 401K and retirement accounts.

During that time, if you have been moving money between accounts, there may be large deposits and withdrawals in some of them.

The mortgage underwriter (or loan approver) will most likely require a complete paper trail of all the deposits and withdrawals. If this happens, expect to be asked to produce deposit receipts, canceled checks, and other seemingly trivial data.

It is a requirement on most loans to completely document the source of funds, for quality control and to eliminate potential fraud. When you move your money around, you make it more difficult for the lender to properly document and approve your loan.

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