What Is Considered a Big Purchase Before Closing?

The period between applying for a mortgage and closing is a significant phase for homebuyers. Maintaining financial stability is important, as changes to your financial situation can jeopardize loan approval. Lenders continuously assess a borrower’s financial health until the mortgage formally closes, evaluating various aspects to confirm eligibility.

Understanding Lender Financial Criteria

Lenders primarily evaluate three financial metrics during the mortgage underwriting process to determine loan eligibility. These include the borrower’s debt-to-income (DTI) ratio, their credit score, and the availability of sufficient cash reserves for the down payment and closing costs.

The debt-to-income ratio, which compares a borrower’s total monthly debt payments to their gross monthly income, is a fundamental indicator of repayment capacity. Acquiring new debt increases the “debt” component of this ratio, potentially exceeding the lender’s acceptable threshold, which commonly ranges from around 36% to 43% for conventional loans.

A borrower’s credit score reflects their creditworthiness and payment history. New credit inquiries, increased credit utilization, or opening new accounts can cause a temporary or sustained drop in the score, potentially moving it below the lender’s minimum requirement.

Cash reserves, including funds for the down payment and closing costs, are also scrutinized. Lenders require verification of these funds, and large, unexplained withdrawals can raise concerns about the source or availability of the necessary capital. These reserves demonstrate the borrower’s ability to cover initial costs and maintain a financial cushion after closing.

Identifying Risky Financial Activities

Many financial actions undertaken between mortgage application and closing can be considered impactful by lenders due to their potential effect on financial stability. Taking on new debt is a primary concern, encompassing actions such as obtaining a new car loan, securing a personal loan, or incurring new student loan obligations. Even signing up for large installment payment plans for items like furniture or electronics can increase monthly debt obligations, thereby affecting the DTI.

Using existing credit cards for substantial purchases or opening new credit card accounts also poses a risk. Such actions can significantly increase credit utilization, which may lower the credit score, or introduce new monthly payments that elevate the debt-to-income ratio.

Co-signing a loan for another individual, while seemingly beneficial to the other party, legally ties the borrower to that debt. This additional contingent liability can be factored into the debt-to-income calculation, impacting eligibility, even if the borrower does not intend to make payments. Furthermore, making large, unexplained cash deposits or withdrawals from bank accounts used for verification can trigger scrutiny, as lenders require a clear paper trail for all funds.

A change in employment status can also be problematic for loan approval. If a borrower changes jobs, especially to a position with a lower salary, commission-based income, or within a different industry, lenders may need to re-verify income stability. A significant reduction in income or a shift to less stable income streams can directly affect the debt-to-income ratio and overall loan approval, as it impacts the perceived ability to repay the mortgage.

Lender Monitoring During Underwriting

Lenders employ several methods to monitor a borrower’s financial situation throughout the underwriting process until the loan closes. Initially, a comprehensive credit report is pulled to assess credit history and outstanding debts. Just prior to closing, lenders often perform a “soft” or sometimes another “hard” credit pull to check for any new accounts, increased balances, or recent inquiries since the initial application.

Employment verification is another ongoing process. Lenders typically re-verify employment status and income stability shortly before closing to confirm the borrower’s current job situation matches the initial application.

Review of bank statements also continues during this period. Lenders may request updated bank statements to ensure that cash reserves for the down payment and closing costs remain consistent. They also scrutinize these statements for any large, unusual transactions that could indicate new undisclosed debts or significant changes in the borrower’s financial standing.

Managing Finances Before Closing

To ensure a smooth mortgage closing, borrowers should exercise caution with their finances from the moment of application until the loan is officially funded. It is prudent to refrain from making any substantial purchases, opening new credit accounts, or incurring additional debt during this sensitive period. Maintaining a consistent financial footprint helps prevent unforeseen complications.

Maintaining consistent employment and income is equally important. Any changes in job status, salary, or income structure should be immediately communicated to the loan officer to prevent last-minute complications. Stability in employment reassures lenders of continued repayment capacity.

Borrowers should also avoid making large, unexplained cash deposits or withdrawals from their bank accounts. All significant transactions should have clear documentation and be discussed with the loan officer in advance. For example, if a down payment gift is received, proper gift letter documentation, as required by lenders, must be provided to avoid delays.

Proactive communication with the loan officer is a valuable strategy. Should any financial change become necessary or unavoidable, discussing it with the lender beforehand allows for guidance on how to best navigate the situation without jeopardizing the loan. This period of heightened financial vigilance typically extends from the initial mortgage application through the final closing documents being signed and the loan being disbursed.