Buying a home is a major milestone, and the process can be both exciting and stressful. One crucial aspect to keep in mind is the impact of your financial decisions leading up to the closing date. Making big purchases before closing on a home can jeopardize your mortgage approval and delay your move-in date. Here’s why you should avoid significant spending before closing on your home.

Impact on Your Credit Score

Your credit score is a key factor in determining your mortgage eligibility and interest rate. When you make large purchases on credit, it can affect your credit utilization ratio—the amount of credit you’re using compared to your total credit limit. A higher credit utilization ratio can lower your credit score, potentially causing lenders to reconsider your mortgage terms or even deny your loan.

Increased Debt-to-Income Ratio

Lenders evaluate your debt-to-income (DTI) ratio to ensure you can manage your mortgage payments along with your other financial obligations. Making big purchases can increase your debt, thus raising your DTI ratio. If your DTI ratio becomes too high, it could disqualify you from your mortgage or lead to less favorable loan terms.

Potential for Loan Denial

Even if you’ve received a pre-approval or conditional approval for your mortgage, lenders often re-evaluate your financial situation before the final approval. Significant changes in your financial status, such as large purchases or new debt, can cause lenders to deny your mortgage at the last minute. This can be particularly devastating if you’re already in the process of moving or have made commitments based on the expected approval.

Impact on Available Funds

Closing on a home involves various costs, including down payments, closing costs, and potential moving expenses. Making large purchases before closing can deplete your available funds, leaving you short on cash when it’s time to finalize the purchase. This can lead to financial stress and may even delay the closing process if you need to secure additional funds.

Changes in Employment Stability

Lenders also look at your employment stability when approving a mortgage. Making big purchases can signal financial instability or irresponsibility, raising concerns about your ability to manage mortgage payments consistently. This perception can impact the lender’s confidence in your financial reliability.

Real-Life Scenarios

To illustrate the impact of big purchases before closing, consider these real-life scenarios:

1. Buying a New Car: Purchasing a new car can significantly impact your credit score and DTI ratio. If you finance the car, the new loan appears on your credit report, increasing your overall debt and monthly obligations. This can lead to a higher DTI ratio, potentially affecting your mortgage approval.
2. Furnishing Your New Home: It’s tempting to buy new furniture and appliances for your new home, but putting these purchases on credit can negatively impact your financial profile. The increased debt and higher credit utilization can lower your credit score and raise red flags for your lender.

Tips to Avoid Financial Pitfalls Before Closing

1. Wait Until After Closing: Delay significant purchases until after you’ve closed on your home. This ensures your financial profile remains stable and reduces the risk of impacting your mortgage approval.
2. Maintain Financial Stability: Keep your credit utilization low, avoid taking on new debt, and continue making timely payments on existing obligations. This demonstrates financial responsibility and stability to your lender.
3. Communicate with Your Lender: If you must make a significant purchase or face an unexpected financial change, communicate with your lender. They can provide guidance on how it might impact your mortgage approval and suggest steps to mitigate potential issues.
4. Stick to a Budget: Create a budget that accounts for your expected closing costs, moving expenses, and any immediate needs after closing. This helps ensure you have sufficient funds available and prevents financial strain.

Conclusion

Avoiding big purchases before closing on a home is essential for maintaining a stable financial profile and securing your mortgage approval. By keeping your credit score intact, managing your debt-to-income ratio, and maintaining available funds, you can ensure a smooth closing process and move into your new home without financial complications.

For more personalized advice on navigating the home buying process and securing your mortgage, contact Collette Horton at Liberty Star Mortgage. With expert guidance, Collette can help you make informed financial decisions and achieve your dream of homeownership.