What Not to Do Before Buying a House

The period before buying a home demands careful financial management. While homebuyers focus on saving for a down payment and finding property, certain actions can undermine efforts. Minor financial or life changes can jeopardize mortgage approval. Lenders scrutinize an applicant’s financial stability and creditworthiness throughout the process. Knowing what behaviors to avoid is crucial for a smooth home-buying experience.

Making Major Financial and Credit Changes

Lenders assess financial health beyond initial application, reviewing credit and activity multiple times, even before closing. Financial decisions during this process impact loan approval.

Opening new credit, like a credit card or personal loan, negatively affects your credit score and debt-to-income (DTI) ratio. New inquiries dip your score, and new accounts reduce credit history age. Using new credit increases debt, impacting DTI. Lenders prefer DTI below 43%.

Conversely, closing old credit accounts can be detrimental. This negatively affects your credit utilization and credit history length. High credit utilization (credit used vs. total available) lowers your score, especially if over 30%. Keep older accounts open with low or no balances to maintain a longer history and favorable utilization.

Large purchases, on credit or with cash, impact your finances. Financing a new car, furniture, or appliances increases debt and DTI. Even large cash purchases deplete funds for down payment and closing costs, which lenders verify. Delay these until after your mortgage closes.

Co-signing a loan carries risk; that debt adds to your DTI, even if you don’t make payments. This can reduce your qualified mortgage amount or lead to denial if your DTI exceeds limits. Lenders view co-signed debt as a liability, as you are responsible if the primary borrower defaults.

Lenders require clear sourcing for all home purchase funds. Undocumented large cash deposits raise red flags, requiring explanation and proof of origin, which can delay or deny the loan if unverified. Regular payroll deposits and transfers between your own verified accounts are acceptable.

Ignoring credit report errors can impact your mortgage application. Inaccuracies negatively affect your credit score, leading to less favorable loan terms or rejection. Obtain copies of your credit reports from all three major bureaus well before applying. Review for discrepancies and dispute promptly, allowing weeks or months for corrections.

Altering Your Employment or Income Stability

Lenders prioritize stable employment and consistent income, reflecting ability to repay. A steady employment history assures reliable income. Underwriters look for a two-year history.

Changing jobs, especially to a different industry or altered pay structure, can concern lenders. Lenders prefer a stable two-year employment history. If compensation changes (e.g., salaried to commission), lenders may require longer documented income. Some lenders may impose a probationary period before considering new job income.

Quitting your job is a red flag for lenders because it eliminates your primary source of income. This action directly impacts your debt-to-income ratio and your capacity to meet monthly mortgage obligations. Without verifiable income, securing a mortgage becomes difficult.

Becoming self-employed also presents challenges for mortgage approval. Lenders typically require a two-year history of tax returns to verify self-employment income, as it can be less predictable than traditional employment. An immediate transition to self-employment before applying for a mortgage can make it difficult to demonstrate the consistent income required for loan qualification.

Taking on a pay cut directly impacts your financial capacity to afford a mortgage. A reduction in income will increase your debt-to-income ratio, potentially disqualifying you for the loan amount you initially sought. Lenders use income thresholds to ensure that a borrower can manage their monthly mortgage payments alongside other financial obligations.

Overlooking Key Pre-Purchase Steps

Skipping due diligence before buying a home can lead to financial repercussions or derail the transaction. Oversights result in unexpected costs or inability to secure financing.

Proceeding without mortgage pre-approval limits options and delays the home-buying process. Pre-qualification estimates affordability based on a brief financial review. Pre-approval involves a thorough lender review, providing a concrete understanding of your qualified loan amount. Sellers often require pre-approval; without it, you may not be taken seriously in a competitive market.

Waiving a home inspection exposes buyers to risks. A professional inspection identifies potential issues with the property’s structure, systems, and components (e.g., plumbing, electrical, HVAC). Overlooking this means inheriting costly repairs or safety hazards after closing. An inspection provides an opportunity to negotiate repairs or adjust the offer.

Failing to understand all associated costs beyond the purchase price can lead to a shortfall at closing. Buyers must budget for closing costs (typically 2-5% of loan amount), including loan origination, appraisal, title insurance, and legal fees.

Ongoing expenses such as property taxes, homeowner’s insurance, and potential homeowner’s association (HOA) fees must be factored into your budget. Property taxes vary by location, but can range from 0.5% to over 2% of the home’s value annually. Homeowner’s insurance premiums average around $1,500 to $2,000 per year. HOA fees, if applicable, can range from $100 to $500 or more per month.

Depleting Your Home Purchase Funds

Managing home purchase funds requires careful attention to avoid jeopardizing closing. Lenders verify the source and availability of funds for down payment and closing costs.

Spending down payment or closing cost funds before closing is a mistake. These funds must remain liquid and accessible in verified accounts. Any withdrawals trigger lender scrutiny, ensuring funds are available.

Moving funds between accounts without clear documentation can concern lenders. Frequent or large transfers without a clear paper trail complicate verification. Lenders trace fund origin to prevent fraud or money laundering. Keep funds in initially disclosed accounts and document transfers clearly.

Borrowing your down payment from undocumented sources can create issues. Lenders require transparency regarding all fund origins. If a gift, a formal gift letter from the donor is required, specifying funds are a gift, not a loan. Unverified or disguised loan funds can delay or deny your mortgage, as lenders need assurance funds are legitimate and not undeclared debt.