Making A Big Purchase The Smart Way
It’s easy for new home buyers to prepare for homeownership by purchasing furniture, appliances, and other big-ticket items.
But as a , know that making a major purchase after initial approval can affect your qualification status.
The mortgage process does not end when you receive your .
Fortunately there are a few smart ways to make bigger purchases without jeopardizing your home loan approval.
Why Big Purchases Matter
When you apply for a mortgage loan, your lender will look closely at your monthly payments compared to how much you make.
This comparison is called your debt-to-income ratio, or DTI. Lenders usually want to see that the amount of your monthly payments do not exceed 43 percent of your pre-tax income.
Financing major purchases will add to the payment side of the equation, increasing your DTI. A higher DTI could result in delays, or in extreme cases, a turned-down loan.
For instance, a home buyer who makes $5,000 will increase his DTI by one percent for every $50-per-month in payments he takes on.
That is not a big deal if he starts at a low DTI of around 35 percent. But if he’s already at the limit of forty-three, additional debt could be a problem.
Tip: If you are unsure how a major purchase will affect your loan approval, speak to your loan officer beforehand. He or she will try to re-approve your loan file with the new hypothetical payment. Avoid the purchase if the new account changes your approval status.
Beware Of Same-As-Cash Offers
Home buyers do not intentionally put their mortgage approval at risk.
Most of the time, they don’t realize new credit accounts will be a problem, or that they are even opening a new credit account.
Such is the case with “same-as-cash” offers.
These programs require zero upfront costs and no payments for a set amount of time. They are usually offered as an incentive to buy furniture, appliances, and other big ticket items.
They can be hard to resist. It can seem better to hang onto cash as you begin your life of homeownership.
Yet these offers are zero-interest-rate credit accounts for which the creditor will eventually require a payment.
Despite the delayed payment requirement, lender will determine the estimated future monthly bill, and add that to your DTI.
If the proposed payment pushes your DTI above 43 percent, the underwriter could have a hard time keeping your loan in an approved status.
Should You Pay Cash?
Paying cash for a major purchase during your loan process seems like a logical option. You avoid opening a new credit account.
However, paying cash could put your approval at risk, but in a different way.
Many loan programs require you to show a cash “cushion” equaling two full mortgage payments, after subtracting the amount needed for the down payment and closing costs.
Depleting your asset accounts could lower your balance below the minimum threshold for approval.
Tip: Before making a big cash purchase, speak to your loan officer. Find out the minimum amount you need to cover all hard costs and the required cushion. You should only make a cash purchase if you have plenty of room to do so.
When Is It Safe To Make A Big Purchase?
Your loan isn’t complete after you receive a commitment letter or pre-approval, or even when you sign final paperwork at the escrow company.
Your lender continues to check your financial situation until the bank “funds.” This is when the bank wires all money involved with the transaction to the escrow company. This usually happens a few days after you sign final loan documents.
Your lender will pull a credit refresh on the day of funding. This credit re-check will show the lender any new accounts or even if existing accounts have higher balances.
While this last-minute check may be intimidating, there’s no need to worry if you have not made any big purchases since your loan application. If you have, your lender can still re-approve your loan on the day of funding in some cases, assuming you still meet guidelines.
Tip: If you want to avoid risk altogether, wait to make a big purchase until you are moved into the home. This is a sure sign that the loan has gone through and the home is officially yours.
What Are Today’s Home Loan Rates?
Owning a home is affordable thanks to low rates available now. Current mortgage rates are steeply discounted and home buyers are enjoying low homeownership costs.
It is an excellent time to check your home buying eligibility and get a monthly payment quote.