If you are already in the process of buying a home, you have most likely already met with a lender who advised you on what to do and what not to do during the escrow process. If you are just getting ready to buy, or plan on doing so in the near future, following these financial tips can make the difference between qualifying or not.
Do not take out more credit –
If you are planning to buy a house in a matter of a few months, forget that new car, Target credit card or Best Buy card to purchase that new television. Taking out more credit can harm your debt-to-income ratio, which can make you look like a credit risk. It is not worth it, no matter how bad you want these items.
Do not pay off all your current credit cards –
Your lender will tell you specifically what you should pay down and what you should leave alone, but banks tend to like responsible credit management. In some cases, that may mean carrying a small balance on one or more cards.
Do not max out all of your credit cards-
Responsible credit management does not mean running every available card up to the limit and/or only making minimum monthly payments. Banks will not look kindly on this when you go to get approved for a loan. Older debts that are getting close to falling off your report should be the last thing you pay.
Be careful with debt consolidation –
If you have a lot of outstanding debt with credit cards and store cards, and can only make the minimum monthly payment on your existing loans – you are going to have a difficult time qualifying for a mortgage loan. You may be tempted to combine your debt together into one payment through a credit consolidation company, but beware of the startup fees and interest rates. Also, an improvement in credit could still be years away.
Do not slack on your current payments –
Your lender will go into more detail about this – but even after you have been prequalified, it is important to keep your payments current on your vehicle, your Visa, etc. Your lender will recheck before closing to make sure nothing has changed in your credit report, if you have new issues, it could affect your loan.
Do not move money around –
There is a story of one home buyer who almost lost his home because he stated on his application that the down payment was coming from a mutual fund account. Then, three days before closing, he decided to sell a baseball card collection instead. The loan had to be underwritten all over. His ownership of the collection, the value and its sale had to be verified, so the closing was delayed and the fees increased.
Do not change jobs before you buy your home –
Among all the other financial information your lender will be collecting when considering your loan, they will also be asking about your employment history. Obviously, it is unlikely you will be approved if you are unemployed. (unless you are independently wealthy) A recent job change could be problematic, if the bank is feeling uneasy about your job security.