So you’re trying to get a mortgage. Congratulations! This is a big step toward owning a home. But if you make a large purchase when trying to qualify for a home loan, you may run into some issues. Let’s take a look at the reasons you shouldn’t empty out your checkbook while trying to get a mortgage.
Your Debt-to-Income Ratio
Throughout the home loan process, your mortgage company asks you to submit various financial documents, such as your pay stubs, bank statements and W-2s. It also calculates something called a debt-to-income (DTI) ratio, which is your total minimum monthly debt payment (such as on your car, student loans, credit cards, etc.) divided by your gross monthly income. The higher your DTI, the more of your monthly check goes to paying back debt. And a high DTI makes you look riskier in the eyes of a mortgage company.
So what’s this have to do with big purchases? If you make a large purchase on credit – say, by treating yourself to a new boat – your DTI will increase. This will certainly slow down the home loan process, and there’s a possibility that it could kill your chances of getting a mortgage at all. Don’t sink your mortgage – get a new home and then go sailing on the open seas. Lay off the big purchases until after you close.
When you’re preapproved for a home loan, your mortgage company wants to make sure that you can make your monthly mortgage payments. They don’t want the closing costs to completely drain your bank account because that would leave you financially vulnerable. In the event that you lose your job or run into financial difficulty, it could prevent you from making your mortgage payments. Instead, a mortgage company likes to see that you have a buffer in your account in case you temporarily lose your income.
As a new homeowner, you may also run into some unexpected maintenance costs after your closing. For instance, you may discover a leak in the roof or termites in the crawlspace. These post-close costs can be expensive. Your mortgage company wants you to have these post-close funds available to provide some security, for both you and the mortgage company. After all, if you’re struggling to find the money to fix your roof, you’re less likely to pay your mortgage payments.
If you make a large purchase during the mortgage process, you could potentially be pulling from these post-close funds, which means you’ll look riskier to the mortgage company.
Generally speaking, you shouldn’t make a large purchase during the mortgage process. That said, some expenses – such as medical bills – are unavoidable. In the event that you need to spend a large amount, chat with a Home Loan Expert first. They’ll take a look at your situation and offer you advice for your specific situation.
Have more questions? Check out this list of other things you shouldn’t do during the mortgage process.
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