Important
Things To Avoid Before Buying a Home
1)
Donīt move Money Around
When
a lender reviews your loan package for approval, one of the things they
are concerned about is the source of funds for your down payment and
closing costs. Most likely, you will be asked to provide statements for
the last two or three months on any of your liquid assets. This includes
checking accounts, savings accounts, money market funds, certificates of
deposit, stock statements, mutual funds, and even your company 401K and
retirement accounts.
If
you have been moving money between accounts during that time, there may
be large deposits and withdrawals in some of them.
The
mortgage underwriter (the person who actually approves your loan) will
probably require a complete paper trail of all the withdrawals and
deposits. You may be required to produce cancelled checks, deposit
receipts, and other seemingly inconsequential data, which could get
quite tedious.
Perhaps
you become exasperated at your lender, but they are only doing their job
correctly. To ensure quality control and eliminate potential fraud, it
is a requirement on most loans to completely document the source of all
funds. Moving your money around, even if you are consolidating your
funds to make it "easier," could make it more difficult for
the lender to properly document.
So
leave your money where it is until you talk to a loan officer.
Oh!
;donīt change banks, either!!
2)
The Effect of Changing Jobs
For
most people, changing employers will not really affect your ability to
qualify for a mortgage loan, especially if you are going to be earning
more money. For some homebuyers, however, the effects of changing
jobs can be disastrous to your loan application.
How
Changing Jobs Affects Buying a Home
For
most people, changing employers will not really affect your ability to
qualify for a mortgage loan. For some homebuyers, however, the effects
of changing jobs can be disastrous to your loan application.
Salaried
Employees
If
you are a salaried employee who does not earn additional income from
commissions, bonuses, or over-time, switching employers should not
create a problem. Just make sure to remain in the same line of work.
Hopefully, you will be earning a higher salary, which will help you
better qualify for a mortgage.
Hourly
Employees
If
your income is based on hourly wages and you work a straight forty hours
a week without over-time, changing jobs should not create any problems.
Commissioned
Employees
If
a substantial portion of your income is derived from commissions, you
should not change jobs before buying a home. This has to do with how
mortgage lenders calculate your income. They average your commissions
over the last two years.
Changing
employers creates an uncertainty about your future earnings from
commissions. There is no track record from which to produce an average.
Even if you are selling the same type of product with essentially the
same commission structure, the underwriter cannot be certain that past
earnings will accurately reflect future earnings.
Changing
jobs would negatively impact your ability to buy a home.
Bonuses
If
a substantial portion of your income on the new job will come from
bonuses, you may want to consider delaying an employment change.
Mortgage lenders will rarely consider future bonuses as income unless
you have been on the same job for two years and have a track record of
receiving those bonuses. Then they will average your bonuses over the
last two years in calculating your income.
Changing
employers means that you do not have the two-year track record necessary
to count bonuses as income.
Part-Time
Employees
If
you earn an hourly income but rarely work forty hours a week, you should
not change jobs. There would be no way to tell how many hours you will
work each week on the new job, so no way to accurately calculate your
income. If you remain on the old job, the lender can just average your
earnings.
Over-Time
Since
all employers award overtime hours differently, your overtime income
cannot be determined if you change jobs. If you stay on your present
job, your lender will give you credit for overtime income. They will
determine your overtime earnings over the last two years, then calculate
a monthly average.
Self-Employment
If
you are considering a change to self-employment before buying a new
home, donīt do it. Buy the home first.
Lenders
like to see a two-year track record of self-employment income when
approving a loan. Plus, self-employed individuals tend to include a lot
of expenses on the Schedule C of their tax returns, especially in the
early years of self-employment. While this minimizes your tax obligation
to the IRS, it also minimizes your income to qualify for a home loan.
If you are considering changing
your business from a sole proprietorship to a partnership or
corporation, you should also delay that until you purchase your new
home.
3)
No Major Purchase of Any Kind
When
an individualīs income starts growing and they manage to set aside some
savings, they commonly experience what may be considered an innate
instinct of modern civilized mankind.
The
desire to spend money!!
Since
North Americans have a special love affair with the automobile, this
becomes a high priority item on the shopping list. Later, other things
will be added and one of those will probably be a house.
However,
by the time home ownership has become more than a distant and hopeful
dream, you may have already bought the car.
It
happens all the time, sometimes just before you contact a lender to get
pre-qualified for a mortgage.
As
part of the interview, you may tell the loan officer your price target.
He will ask about your income, your savings and your debts, then give
you his opinion. "If only you didnīt have this car payment,"
he might begin, "you would certainly qualify for a home loan to buy
that house."
The
above applies to any major purchase that would create debt of any kind.
This includes furniture, appliances, electronic equipment, jewelry,
vacations, expensive weddings;
4)
Debt To Income Ratios And Car Payments
When
determining your ability to qualify for a mortgage, a lender looks at
what is called your "debt-to-income" ratio. A debt-to-income
ratio is the percentage of your gross monthly income (before taxes) that
you spend on debt. This will include your monthly housing costs,
including principal, interest, taxes, insurance, and homeownerīs
association fees, if any. It will also include your monthly consumer
debt, including credit cards, student loans, installment debt, and car
payments.
5)
How a New Car Payment Reduces Your Purchase Price
Suppose
you earn $5000 a month and you have a car payment of $400. At 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
the car payment.
Even
if you feel you can afford the car payment, mortgage companies approve
your mortgage based on their guidelines, not yours. Do not get
discouraged, however. You should still take the time to get
pre-qualified and pre-approved by a lender.
However,
if you have not already bought a car, remember one thing. Whenever the
thought of buying a car enters your mind, think ahead. Think about
buying a home first. Buying a home is a much more important purchase
when considering your future financial well being.
