What Is Considered a Big Purchase During Underwriting?

Underwriting is a fundamental stage in the loan application process where lenders assess the risk of extending credit. Lenders meticulously examine an applicant’s financial standing to determine their capacity to repay the loan and ensure they can manage the new financial obligation. Financial activities undertaken by an applicant while their loan is in underwriting are closely monitored and can significantly influence the final approval decision.

The Underwriting Process and Financial Review

Underwriters review an applicant’s financial profile to verify their ability to repay a new loan. They examine income, assets, debts, and credit history to assess financial health and gauge risk.

Underwriters scrutinize financial documents like bank statements, pay stubs, and tax returns, often from the last two years. Credit reports are also pulled to assess payment behavior and outstanding obligations.

This review identifies consistency and stability in financial behavior. Underwriters look for reliable income, sufficient assets for down payments and closing costs, and manageable debt. Irregularities or significant financial changes can prompt further investigation and impact the loan decision.

Types of Purchases That Raise Concerns

A “big purchase” during underwriting is defined by its potential impact on an applicant’s financial stability, not a fixed dollar amount. Underwriters view any transaction that significantly alters an applicant’s financial picture as a concern, indicating a shift in financial priorities or capacity that affects risk assessment.

Taking on new debt, such as car loans, personal loans, or student loans, is a primary red flag. Significantly increasing credit card balances also raises overall debt obligations.

Depleting cash reserves is another concern. Large withdrawals from accounts designated for down payments, closing costs, or post-closing reserves can jeopardize a loan. Lenders verify the availability and source of these funds.

Large, unexplained deposits also raise scrutiny. These deposits require clear documentation of their source to rule out issues like undisclosed loans or money laundering. Similarly, significant transfers of money between accounts or to other individuals without proper documentation can complicate verification.

How Purchases Affect Loan Approval

Financial decisions during underwriting directly impact key metrics lenders use to evaluate borrower risk. These metrics determine loan approval and terms, explaining why certain purchases can jeopardize approval.

One primary concern is the debt-to-income (DTI) ratio, which compares total monthly debt payments to gross monthly income. New debt, like a car loan or increased credit card balances, elevates the DTI ratio, potentially exceeding acceptable limits. Most lenders prefer a DTI of 36% or below, though some programs allow higher ratios, sometimes up to 43% or 50% with strong compensating factors.

New credit inquiries or increased credit utilization from large purchases can negatively affect an applicant’s credit score. A lowered credit score signals increased risk, potentially leading to less favorable loan terms or denial. Lenders often perform a final credit check before closing to catch recent changes.

Depleting cash reserves for large purchases reduces funds for down payment, closing costs, and post-closing liquidity. Lenders require sufficient funds to cover these expenses; a reduction can halt the loan process. Erratic or large transactions can make an applicant appear financially unstable, raising concerns about managing future loan payments.

Strategies for Financial Management During Underwriting

Maintaining consistent financial behavior is paramount during underwriting. Applicants should avoid applying for any new credit, such as car loans, personal loans, or credit cards. Opening new accounts or increasing existing credit limits can alter the debt-to-income ratio and negatively impact credit scores.

It is advisable to refrain from making large, unusual purchases that could affect cash reserves or necessitate new debt. This includes buying furniture, major appliances, or taking expensive vacations. Such expenditures can deplete funds earmarked for the loan’s down payment and closing costs, which lenders verify.

Applicants should limit large deposits or withdrawals unless clearly documented and sourced. Large unexplained deposits can raise red flags, requiring explanations and potentially delaying approval. Maintaining stable employment and avoiding job changes is also important, as underwriters prefer a consistent work history for at least two years.

Communicating proactively with the loan officer or lender about any necessary large transactions or financial changes is recommended. Transparency helps the lender understand the situation and can prevent misunderstandings or delays. By exercising financial discipline, applicants can ensure a smoother path to loan approval.