Financial Mistakes to Avoid When Buying a Home

If you are looking to buy a home in the coming months you will be faced with a ton of decisions. We all know that the “process” can sometimes be dizzying so let’s try and clear the cobwebs by pointing out some basic logic and common pitfalls that you may not realize until it is too late. Of course all of the advice below applies for purchase transactions but if you are thinking of refinancing your current mortgage please follow these same recommendations.

Credit check
The day that you think you want to buy a house you should contact your mortgage planner to have them review your credit. You don’t want to be caught off guard with a below average credit report and of course the better your credit is the more options you will have available. By reviewing your credit months in advance with your mortgage planner you will have time to repair any issues before you actually have to apply for a loan. Of course, before you permit them to run your credit make sure you have opted out of the trigger lists so your personal information and credit score does not get sold.

Incur debt
Today it is easier than ever to make purchases with your credit cards. This is usually done out of necessity and the ease of their use but often just to keep up with the Joneses when you don’t have the cash to pay in full. If you are contemplating purchasing a new home within the next few months try to avoid any items that you will not be able to pay off in full when the statement arrives. While this is always the ideal way to pay for things, ensure that your credit cards have a zero balance before you begin to search for a new home.

Cars
The advice above holds true for car leases and loans. If you can avoid it do not make any new purchases or upgrades until after you close on your new home. If you have to finance a new car because your current lease is due to expire please counsel with your mortgage planner before incurring this new loan as it could knock your debt-to-income ratios out of the park; unlike baseball this not a good thing.

Maintaining reserves
This is a big issue that has become even more important as lending requirements have gotten tougher. You want to build your reserves (aka savings and investments) to have at least three months of your total expenses and preferably six months of expenses AFTER your down payment and all of your closing costs are paid. Having less than this will cause most lenders to deny you a loan and of course this will put you in a shaky situation should you lose your job or become disabled. While most lenders will permit this amount to be held in retirement accounts my recommendation is for this to be held in non-qualified liquid accounts that you can access without incurring any penalties.

Move money around
It is tempting to change bank accounts or investment accounts for better online services and/or interest rates but here again you should wait until after you close on your new house. Lenders like to see a history of at least two months worth of bank statements. If you move money around it will make it harder for the underwriters to track and you don’t want to raise any undo scrutiny with them. If you absolutely must change banks before a closing then ensure that you make copies of all checks and deposit slips in order to trace and source the funds. Of course the lender will require copies of statements from your old bank and the new one to cross reference your story so set these aside.

Change jobs
Lenders like to see a steady employment history. If you are going to change jobs before you buy your next home ensure that it is a move up in pay and/or responsibility. Lateral moves are okay but they should be in the same industry. If you are going to be making a move please advise your mortgage planner about this during your first meeting or as soon as you begin to contemplate the change so she can plan accordingly and help direct the information to the underwriter.

Wait until last minute to apply
Like everything else in life, if you wait until the last minute to apply for a mortgage, you will not give yourself enough time to research and ensure that you get the best program for your family. When purchasing a home, you should start the process with your mortgage planner - not the realtor. After you and your mortgage planner have analyzed your goals, dreams and finances you then enlist a realtor with a mortgage plan in hand to help you find your home.

Your realtor will also appreciate this; she will know that you are qualified to be looking at the price point you requested. By doing it the other way around (as most do), you will be rushed into a home-buying decision and act out of impulse or emotion, and not from sound thinking. On refinance transactions most people wait until they can no longer pay their bills or late notices start to pile up.

Straddling two houses
This is becoming a big downfall for many people across the country as they bought their new home thinking they would sell their current home. The problem for most is that they do not have the cash to carry two houses. My advice is that if you are thinking of buying a new home you should sell your existing one first. Now this may mean that you might have to rent for a while if you don’t have a house lined up but that is much better than losing one or both in foreclosure because you could not afford to make the mortgage payments. That in turn will destroy your credit and you know how important good credit is. Besides, if the value of real estate continues to decline as I think it will, you will be able to get a better deal on that next house.

Hopefully the above advice is not a shock to you but unless you s l o w d o w n and analyze what you are doing you may unknowingly create a negative situation. If you are just beginning to think about buying a new home or refinancing your current mortgage, pick up the phone and call your mortgage planner today. Make life happen and Take ControlSM of your financial future; you will be glad you did.


Dave Muti, JD, RMA, is the author of Mortgages: What You Need to Know (Pocket Guide Press 2008) and a Senior Mortgage Planner with Millenium Home Mortgage, LLC located in Parsippany, New Jersey. He can be contacted at dave@DaveMuti.com. New Jersey Society of CPAs. Reprinted with permission.