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Review the loan commitment
“There have been dozens of regulatory changes in recent years,” says Staci Titsworth, vice president and regional manager for PNC Mortgage. So even if you’ve refinanced or bought a house before, this time around could be a little different.
“Review the loan commitment for any outstanding conditions,” she says. “It will say what conditions need to be met.”
So even though you’ve been provisionally approved, the lender might need more information about such things as gaps in your resume, an explanation as to where those down payment dollars came from and updated salary numbers.
“It’s very important that the consumer not lose sight of the commitments and conditions,” says Titsworth.
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Don’t set yourself up to be ‘house-poor’
Don’t confuse the selling price with the total cost of the home.
When you get approved for a $300,000 home loan, that doesn’t mean you can buy a $300,000 home. Your spending limit is generally a lot less.
That’s because that monthly payment will likely include other costs that aren’t reflected in the sales price, such as homeowners association dues, property taxes, flood or storm insurance and private mortgage insurance, says Titsworth.
You’ll also need to build a nice emergency fund to cover repairs and maintenance.
Think about the monthly payment that’s comfortable for you, says Katie Miller, vice president of mortgage lending for Navy Federal Credit Union. Just because a lender is willing to give you a certain amount, doesn’t mean you have to take it all. Look at what kind of sacrifices you’ll have to make to cover payments on the house you want.
Draft a shopping budget based on the loan terms and the monthly payment that’s comfortably for you. Otherwise, you risk buying a home that’s outside your price range.
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Create a paper trail
When you’re trying to buy a home, any bit of extra cash is welcome — from bonus checks to a donation from the in-laws.
But you want to be scrupulous in documenting every dollar that doesn’t come from your regular income, says Titsworth. Today’s homebuying regulations are a lot stricter. That means cash deposits and checks that aren’t part of your regular paycheck stream have to be noted and explained with supporting paperwork.
“We see it, and it’s one of the most common things a loan officer will have to document on a loan file,” says Titsworth.
So the in-laws may have to write a short note, explaining how much they donated and where it’s from. And loan officers will verify all those details.
You probably think that once you’ve been preapproved for a loan, you can stop putting away savings for your new home.
Not so, says Barry Zigas, director of housing policy for the Consumer Federation of America.
Instead, keep socking away those dollars. That way, when you do buy, you’ll have money left over for repairs, upgrades and furniture.
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The rules aren’t more forgiving for repeat buyers
Whether or not you get a loan comes down to the underwriting.
If you’ve ever purchased a diamond, you’ve heard of the “4 C’s.” When you buy a home, there are 5, says Titsworth. And these are the things that are analyzed by underwriters — the experts who crunch the numbers on your loan and your ability to repay it:
- Credit
- Capability
- Collateral
- Character
- Cash
Underwriters don’t make allowances for new or repeat buyers, she says. Since underwriting is federally regulated and the number of times you’ve purchased a home isn’t a factor, underwriters won’t even know whether you’re a newbie buyer or a seasoned pro, says Titsworth. “Everybody’s treated the same.”
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No big buys (without consulting the lender)
Until you leave the closing table, the mortgage lender is your new financial quarterback.
That means no big purchases with cash or credit cards unless you run it past the lender first, says Titsworth.
Miller agrees. “As soon as you’re in the process, you will hear every lender say, ‘Do not make any large purchases,'” she says.
The reason: The lender has to assess your debt-to-income ratio and your ability to repay the loan, and suddenly depleting your cash or running up card balances can alter those numbers — sometimes enough to put the brakes on your preapproved loan, she says.
Both lenders and their regulators want to know if those numbers change, says Titsworth. “They care a lot.”
And if that debt-to-income ratio changes too much, it could cost you the loan, says Miller.
So is the answer to make big purchases out of pocket? Not necessarily, she says. If the mortgage preapproval was predicated on your having a certain amount in savings and you spend a significant amount before the closing, that could be a problem, too.
During the mortgage process, the goal is to maintain a stable financial holding pattern until after the closing, says Miller.
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Pay bills on time
Paying late is one of the biggest strikes against you in the credit department.
That’s because lenders see late payments as a sign of financial stress — reasoning that if you had the money, you’d pay bills on time. On the other side of the seesaw, they view paying on time as a sign of good financial health.
The effect of a late payment will vary with your history, says Titsworth. If your history is spotless, you may not have a problem. If you have a past bankruptcy or other blemishes, “It could raise red flags” for the lender, she adds.
So you have to continue to display the good behavior that got you that mortgage preapproval in the first place. Make sure everything is paid on or before the due date. Never let anything lapse 30 days, the point at which some creditors will report your late payments to credit bureaus.
And just in case you have a creditor who’s slow to credit your on-time payments or who may have reported a payment late when it wasn’t, use a method that allows you to demonstrate when you paid — like an electronic check or a paper check sent by certified mail.
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No new credit
During the phase between mortgage preapproval and closing, your mortgage lender wants to be the only new creditor in your life.
That’s because each time you apply for credit, several things happen simultaneously. The request alone can lower your score, according to FICO, the company that pioneered credit scoring.
If you get new credit and use it, your debt load will go up — which could threaten your pending mortgage. If you don’t use it, your access to more credit (and debt) could still scare your mortgage lender.
When any of your financial numbers (credit score, debt-to-income ratio, amount of available credit) change, lenders will likely need to re-evaluate their mortgage offer. That means the institution could also decide to loan less money, charge a higher rate or not make the loan at all.
You also have to live your life, and things happen, says Titsworth.
“We certainly see situations where the car lease will run out” just before or after someone is approved for a home loan, she says. And that new lease is $50 to $100 more.
“We just have to make sure they have the ability to pay the additional $100 a month,” says Titsworth.
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Don’t co-sign, no matter what
What many co-signers don’t know: When you co-sign a loan for someone else, that debt goes on your credit history and counts as one of your own. That means lenders include the entire balance as if it’s yours alone when they calculate your debt-to-income ratio, says Titsworth.
So even if the borrower pays every bill on time and you never have to contribute a dollar, co-signing could still impact your ability to borrow.
The last thing you want to do right before you close on a home or refinance a mortgage is sign your name to another loan and boost your debt load, says Miller. “Decline or defer until after the mortgage is closed.”
Even after the closing, a homeowner “should give serious consideration to the financial implications should they be left holding the bag,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling.
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Read your closing docs
Lenders are now required to share the closing documents before the closing, so read them and get familiar with them, says Zigas. Ask questions.
“If there’s some fee you don’t understand or some charge you think shouldn’t be there, that’s the time to do that,” he says.
And if you don’t understand what you’re reading, this could also be the time to hire a real estate attorney who represents you alone — not the seller, the real estate agency or the lender.
It’s also a good time to do a little more due diligence on the house — with things like appraisals and inspections, Zigas says.
And don’t forget to check out things like the commute, area crime stats, the home’s past insurance claims (via the Comprehensive Loss Underwriting Exchange or “CLUE” report), and whether or not you’ll need flood insurance.
Says Zigas, “There’s a lot to be doing.”
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