Preparing to buy a house? Here's what you shouldn't do in the months leading up to the purchase.
If today's low mortgage rates have inspired you to buy a home, you're probably excited to get out there and see what's available. Before heading out, learn the five things you should avoid doing in the months leading up to your house hunt.
1. Change jobs
Mortgage lenders look for stability when they assess your loan application, and part of that involves having the same job for a period of time. Here's a breakdown of how long lenders would like you to be on the job, depending on the type of mortgage you're after:
- Conventional mortgage: Lenders look for two years of job history. If there are gaps in your employment, you'll need to be in your current job for six months.
- FHA loan: Just like with a conventional mortgage, lenders want two years of job history and look for six months on the job if there are employment gaps.
- VA loan: If you've recently left the military or recently graduated from college, you may not have two years of new work history. If you can show continuity between your current job and your military occupational specialty, training, or formal education, a lender sees it as less of a "gap" and more of a shift.
- USDA mortgage: You must have 12 months on the job. The USDA also encourages lenders to look at two years of employment history. If you're using retirement income, Social Security benefits, or an alternate type of income, you may be eligible for a different time frame.
One important thing to keep in mind is that lenders understand that people change jobs, particularly in this economy. Continuity may be key. For example, say you're a mechanical engineer with Company A for a couple of years, do the same type of work for Company B for a couple of years, and now work as a mechanical engineer for Company C. In that case, two things are clear to a lender:
- You have no trouble getting a job when you need one.
- You have expertise in a specific field that continues from one company to another.
That type of continuity and job history is not necessarily a deal-breaker for lenders, even though you've changed jobs a few times.
2. Take on new debt
Let's say you take a break from the rigors of house hunting and on impulse, decide a new car will make you feel better. Making any major purchase before buying a home is not usually a good idea. During the loan application process, the lender checks your debt-to-income (DTI) ratio. DTI is the amount of money you owe in relation to your monthly income. Say your gross monthly income is $5,000 and your monthly debts equal $1,225. $1,225 divided by $5,000 = 24.5% (your DTI).
The lower your DTI, the more confident a lender is in your ability to repay the loan. All new debt will raise your DTI, and that will decrease lender confidence in your ability to repay.
3. Miss bills
Typically, you should always pay bills on time to keep your credit score strong. The higher your credit score, the easier it is to qualify for a low interest rate on a mortgage. If you're having trouble paying your current bills, now may not be the best time to buy a home.
4. Loan money
COVID-19 has left devastation in its wake, including financial problems for millions of Americans. You may know at least a few people who are trying to find their financial feet. If you're asked to loan money, it may help to have a response ready in advance. For example, you might say, "I'm sorry. I would normally be able to help you out, but I'm going to need every dollar at my disposal to purchase a home." Buying a house is a big responsibility, and you'll want to keep yourself on stable financial ground during this process.
5. Cosign a loan
In fact, keep the same response ready if anyone asks you to cosign a loan. When someone asks you to cosign a loan, it's because they don't qualify on their own. There's a reason for that. Either they haven't had time to build a sufficient credit history or they have a record of not paying bills. In either case, by cosigning, you take on responsibility for their behavior. If they fail to make payments, you're legally responsible. When a lender checks your credit report, the loan you cosigned shows up as though it's your loan. It will also affect your DTI.
You've likely heard plenty about the things you should do before buying a home, but it's often the things that should not be done that stall loan approval or make it harder to get a place of your own. Buying a home in today's climate can be stressful enough. Don't add to the strain by complicating your ability to land a loan once you've found the property of your dreams.
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