You've found your dream home, you're packed and ready to go, the only step left is the closing of the loan. At first thought this may seem insignificant. You've already turned in every financial document anyone this side of the moon could conceive of, you've signed your first born away and put down a sizable earnest money deposit. Closing can easily seem like bureaucratic nonsense, but there is more to it than that. Prior to closing lenders give everything one final review.
They do one last check to make sure everything is still in order and ready for closing. In this they verify key pieces of the loan such as employment and credit. Don't risk your house and your loan. Below are the top 5 pitfalls to avoid before closing your loan.
1. Open new lines of credit. Don't do it, don't even think about it or you risk losing your loan. Your credit is monitored until the very moment your loan closes. Opening a new line of credit can ding your credit score. A drop in credit score could preclude you from qualifying for the loan. You can't close it once it's open; so the damage will be done. Unless you have other previously accounted for lines of credit with balances above 30% that can be paid down there will be very little you can do to counteract this. If you absolutely need the credit wait until after closing. Borrow the money from your parents, brother, sister, neighbor, but don't risk losing your house over a new line of credit.
2. Drive up balances on existing credit. This goes hand in hand with number one. Increases in credit above 30% drop your credit score, which puts you in the same position as number one. However, utilizing credit goes against your debt to income ratio. So now you're taking a double hit, one against your credit and the other against your debt to income ratio. It's not worth it. It may seem tempting to buy new curtains, rugs and furniture for your humble abode, but just wait.
Lender's can revoke a loan up until the moment it closes and you have the keys in your hand. So until your loan closes make a few new Pinterest boards and be patient. Jumping the gun isn't worth losing your home.
3. Lease a car. I know you may be looking at me confused right now; it's a lease and doesn't involve credit, what could possibly be wrong?
But it does. Leases involve a hard credit check, which will tip off your lender to a potential new debt. And that is exactly how leases are treated. The monthly payment will be treated like any other debt payment and count against your debt to income ratio. It's easy to get caught up in the excitement of a new home and want to add a new car to the mix, but as it's been said be patient. Wait until you have the keys in your hand to add a vehicle lease to your financial mix.
4. Switch Jobs. This one too can be confusing. What does it matter if you're making the same or more than at your previous position? The trouble arises in verifying income. The bank will have to verify that you are not at your previous employer, what your wages are in your new position and if there was any lapse. Depending on the time frame it may be difficult to supply adequate documentation of this right off the bat. While this doesn't necessarily guarantee that you lose your loan it can delay closing and put your deposit at risk. If you're offered a new job simply ask to delay your start date until after closing. Most employers will understand this and allow you to delay your move. As with the theme of this blog, patience is key.
5. Cosign a loan. Most people would advise against this in the best of circumstances, but it is especially dire during the home buying process. Cosigning a loan is making you financially liable for someone else's debt. Not only will your credit take a hit when the lender for your cosigner pulls it, but the monthly payment will be added to your affordability profile. It doesn't matter that you don't currently or even except to ever have to pay this. You are liable, which means if the primary borrower can't make the payments you will have to.
Depending on the size of the loan this could put you over the acceptable debt to income ratio. Buying a home actually provides a fantastic out for this enormous favor. Simply let your friend or family member know that you've found your dream home and the lender won't close the loan if you've cosigned. It's the truth and keeps you from being liable for someone else's debt.
Buying a home is one of the most exciting transaction you will ever enter into. It's also an incredibly complex one. Until your loan closes ask questions about how your actions may affect the loan. They would much rather have you ask first and avoid disaster than try after the fact to save a floundering loan. Be patient. While it might seem like eons before your loan closes this usually happens relatively quickly. Patience is a virtue demanded while buying a home. Don't let a silly misstep cost you your dream home.