10 Things To Avoid When Buying A House

As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications

If you’re buying a house, it’s a very exciting time. There’s also a ton to do. You may be tempted to go out and buy furniture to fill your home or you might want to use a wedding gift from grandma to help with the down payment.

While doing both is absolutely possible, it can put your mortgage transaction in jeopardy if you don’t go about doing them the right way. No one wants that to happen, so follow these guidelines to ensure your home buying process goes smoothly.

Credit

Credit plays a huge role in your mortgage qualification process, so you have to be extremely careful leading up to the time when you get a mortgage. Here are several tips to make sure it’s smooth sailing for you:

Avoid Large Purchases On Credit

Your debt-to-income ratio (DTI) is a key qualification factor. It’s a ratio simply comparing debts that show up on your credit report monthly to your monthly income. It’s the main way lenders determine how much you can afford in addition to how much you have saved for a down payment. The formula is as follows:

As an example, let’s say you make $60,000 per year. You have $200 in minimum credit card payments across several accounts. You also have a $400 car payment, $500 monthly in student loan payments and $1,200 for your mortgage payment. Your DTI would be 46% ($2,300/$5,000).

For the best chance of mortgage approval, you really want to keep your DTI no higher than 43% in order to qualify for the most possible loan options. If you’re on the edge of approval, one of the things mortgage investor Fannie Mae looks at is your credit card behavior. They’re particularly interested in something called trended credit.

In a trended credit analysis, Fannie Mae looks at your credit card behavior. If you’re someone who makes the minimum payment every month, you’re less likely to be approved than someone who pays their full bill (or at least the majority) every month. A smaller credit card bill is easier to pay off.

Another reason for keeping your credit card purchases in check is to keep your utilization low. Credit utilization looks at your monthly credit card balance in comparison to your credit limit. So if you had a credit limit of $10,000 between several accounts and your balances totaled $2,000 when the credit bureaus checked that month, your credit utilization would be 20%.

In calculating your score, FICO^® takes into account the total amount of debt you have. If you already have a car payment, student loans and other installment debts that aren’t going to change, the one thing you have direct control over keeping down is your credit utilization. While going through the loan process, you should avoid large credit card purchases that significantly increase your balance because it can affect your score.

Don’t Open New Accounts Or Loans

It’s equally vital not to open any new credit cards or loans during your mortgage process. There are two reasons for this.

Firstly, each time you apply for or open a new credit card or loan of any kind, your credit score takes a dip when you make the inquiry. The idea here is that companies think you might be overextending yourself if you apply for new credit. If you do the right thing like making your payments on time, your credit should bounce back in about 3 months. But in the middle of your loan process, taking steps to obtain a new credit card isn’t a great idea.

Moreover, you don’t want to go get a car at the same time and have to take on another loan because the added monthly payment may push you out of range to qualify for your particular loan program.

Avoid Late Payments

If you want to give yourself the best chance to qualify for any particular loan option, the best thing to do is make sure you stay current on all of your payments. Lenders report a late payment to the credit bureaus once a bill is 30 days overdue.

Although the effect of late payments fades over time, they stay on your credit report for 7 years. You don’t want them if they can be avoided.

Don’t Fall For A Debt Consolidation Trap

Debt consolidation can be a good idea if you can combine your higher-interest payments into a single payment at a lower rate. However, you need to know what to look for and be careful.

In some cases, the interest rate can go up after a certain period of time or there may be hidden fees. Consequently, it’s important to have a good understanding of the terms so you don’t go in blind.

If you’re looking to investigate debt consolidation before you apply to buy a house, one thing that could be really helpful is a personal loan. Our friends at Rocket Loans^® offer personal loans between $2,000 – $45,000 with payback terms of 3 or 5 years.¹

If debt consolidation sounds like something you want to pursue, you should do it before you apply for a mortgage to avoid potential issues with DTI in the middle of the mortgage process.

Assets

Just as significant as your credit is in making sure you have enough assets to cover your down payment, so are closing costs and any reserves you may need to have. Reserves are funds you have in case you lose a source of income temporarily. Mortgage companies want to see you’re able to make a certain number of monthly mortgage payments if there’s an unexpected event that impacts your finances.

The next sections will go over what you need to know in terms of documenting your assets.

Avoid Large Unsourced Deposits

During the underwriting process your mortgage lender may ask you to verify any deposit it feels it needs to check on, but mortgage investors have their own requirements.

First, there’s the 50% rule. If you’re getting a conventional, jumbo or VA loan, any deposit exceeding 50% of your monthly income use to qualify for the mortgage needs to be verified.

In the case of FHA and USDA loans, there’s a rule prohibiting deposits that exceed 1% of the purchase price or appraised value, whichever is lower.

You should note that this rule applies to one-time or irregular deposits. If you receive regular paychecks, these funds are OK and were already sourced through regular income documentation.

Gift Funds

If you plan on getting gift funds for your down payment in support of your mortgage, those funds have to be transferred the proper way.

First, let’s go over who can give a gift. For conventional loans, you can get a gift from the following people:

• Spouse
• Parent (including step and foster)
• Grandparent (including great, step and foster)
• Aunt/uncle (including great and step)
• Niece/nephew (including step)
• Cousin (including step and adopted)
• In-laws (including parents, grandparents, aunt/uncle, brother-in-law and sister-in-law)
• Child (including step, foster and adopted)
• Sibling (including step, foster and adopted)
• Domestic partner
• Relatives of domestic partner (Fannie Mae only)
• Fiancé
• Godparents (Fannie Mae only)
• Former relatives (Fannie Mae only)

If your lender offers loans backed by Fannie Mae, you can also receive gift funds from future in-laws.

For FHA loans, in addition to all the family members mentioned above (including future in-laws), you can also get gift funds from the following:

• Employer
• Labor union
• Charitable organization
• Government agency or other public entity
• Close friend (may include extended family and even former spouses)

The USDA and Department of Veterans Affairs will allow anyone who’s not an interested party to the transaction give a gift. Examples of interested parties include but aren’t limited to, the following:

• Seller
• Builder
• Developer
• Real estate agent

Beyond that, if you’re getting gift funds, you’ll need to have the donor provide a signed gift letter which includes the following:

• The donor’s name, address and phone number
• The donor’s relationship to the client
• The dollar amount of the gift
• The date the funds were transferred or will be given
• A statement from the donor that no repayment is expected
• The address of the property being purchased
• A statement that has both the donor and recipient confirm they didn’t get the funds from anyone connected with the transaction
• Signature of both donor and recipient

There will need to be evidence of transfer through something like a withdrawal and deposit slip. In certain instances, it may be necessary to have a bank statement from the donor showing that they had the funds for the gift in their possession for at least 30 days.

Finally, in limited circumstances, it may be necessary for the buyer to contribute a minimum amount to the down payment even when receiving gift funds. We recommend speaking with your mortgage lender in order to confirm what’s necessary in your situation.

Don’t Switch Bank Accounts

It’s important to not move a bunch of money around during your mortgage process because your lender will be using your accounts to source your funds. Therefore, you shouldn’t jump between accounts during the process just because you can get a higher interest rate on your savings.

It’s very important to keep your accounts at the status quo during the loan process and guarantee that you’re able to show all current asset documentation.

Document Any Sales You Make

If you sell anything (like old furniture or electronics) to raise cash for reserves or closing costs, there are a couple of things to keep in mind.

First, there has to be documentation that this was yours to sell. Your lender may not be able to let you use the cash from the sale toward closing unless you have an original sales receipt or the title (in the case of something like a car).

Second, you need a receipt for the amount of the sale so everything is documented and you can show where the new money came from.

Other Things To Keep In Mind