Real Estate TipsThings Not To Do Before Buying a Home
No Major Purchases of Any Kind: when determining your ability to qualify for a mortgage, a lender looks at what is called your debt-to-income ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and more. Avoiding major purchases prior to purchasing a home will results in a lower debt to income ratio and thus make you a more attractive borrower to the lending company.
Don't Move Money Around: When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
So leave your money where it is until you talk to a loan officer.
Should You Change Jobs? - For most people, changing employers will not really affect your ability to qualify for a mortgage loan. For some homebuyers, however, the effects of changing jobs can be disastrous to your loan application.
Salaried Employees - If you are a salaried employee who does not earn additional income from commissions, bonuses, or over-time, switching employers should not create a problem.
Hourly Employees - If your income is based on hourly wages and you work a straight forty hours a week without over-time, changing jobs should not create any problems.
Commissioned Employees - If a substantial portion of your income is derived from commissions, you should not change jobs before buying a home. This has to do with how mortgage lenders calculate your income. They average your commissions over the last two years.
Changing employers creates an uncertainty about your future earnings from commissions. There is no track record from which to produce an average.
Bonuses - If a substantial portion of your income on the new job will come from bonuses, you may want to consider delaying an employment change. Mortgage lenders will rarely consider future bonuses as income unless you have been on the same job for two years and have a track record of receiving those bonuses. Then they will average your bonuses over the last two years in calculating your income.
Part-Time Employees - If you earn an hourly income but rarely work forty hours a week, you should not change jobs. There would be no way to tell how many hours you will work each week on the new job, thus no way to accurately calculate your income. If you remain on the old job, the lender can just average your earnings.
Over-Time - Since all employers award overtime hours differently, your overtime income cannot be determined if you change jobs. If you stay on your present job, your lender will give you credit for overtime income. They will determine your overtime earnings over the last two years, then calculate a monthly average.
Self-Employment - If you are considering a change to self-employment before buying a new home, don’t do it. Buy the home first.
Lenders like to see a two-year track record of self-employment income when approving a loan. Plus, self-employed individuals tend to include a lot of expenses on the Schedule C of their tax returns, especially in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income to qualify for a home loan.
If you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay that until you purchase your new home.
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