Eight Credit Mistakes Homebuyers Make
Most Realtors have stories about past clients who have made some serious mistakes after having their offer on a home accepted.
Like the buyers who pulled up to the property to meet with the home inspector, and they were driving a brand-new car. The husband proudly said, “Check this out — now that we know we are going to have a garage, we bought a car to go in it.”
Unfortunately, their new car purchase pushed their debt ratio over the limit, and they no longer qualified for the mortgage required to purchase the home. That was not a happy day for the buyers.
If you are planning to buy a home, the following advice should help you to avoid doing anything that could affect your chances of completing a transaction after you have a signed purchase contract. These are the top 8 things you should never do once you begin looking to buy a home:
- Don’t apply for new credit
Every time you apply for new credit, your credit will be pulled by a potential creditor or lender, and this runs the risk of immediately reducing your credit score. So don’t apply for a Home Depot or furniture store credit card until after your transaction has closed.
- Don’t make any large purchases
We advise our clients to avoid any large purchases using a credit card until escrow has closed. It always seems to be the case that the new appliances you want go on sale just when you want to buy them, but increasing credit card debt is not a good idea at this time. If you have enough reserves that you can pay cash, go ahead, but otherwise, just be patient.
- Don’t pay off collections or ‘charge offs’
This point might seem counterintuitive, but once you have gotten a firm pre-approval for a loan, you really need to minimize any actions that could change your credit situation. Credit bureaus work in mysterious ways and lenders will quite possibly take a final look at your credit score before they fund your loan.
- Don’t close credit card accounts
Logically, it would seem to be s a good idea to have as little credit exposure as possible before applying for a loan, but in practice, if you close a credit card account, it might appear that your debt ratio has gone up. This will also affect other factors in the score, including credit history. Lenders use active credit lines to establish creditworthiness, so they need to stay active.
- Don’t max out credit card accounts
In an ideal world, you should keep your credit card balances to below 30 percent of their limit during the loan process. We now that this is not always possible but at least keep any credit card spending to a minimum during the homebuying process.
- Don’t consolidate your debt
When consolidating debt onto one or two cards, it appears that the buyer is “maxed out” on that card and will therefore be penalized.
- Don’t deposit cash into your bank accounts
Lenders want to know what is the source of your funds. If some of it is money from a family member, the lender wants to know that up front and they will want to see a gift letter.
- Don’t do anything unusual
Getting a new job, changing your name or address, missing payments, making late payments, changing spending patterns or changing banks, all of these could be recipes for disaster. It’s hard enough to get an offer accepted right now, so don’t do anything that could hurt your chances of closing.
