If you plan on purchasing a home this year, you’re not alone. There are currently more willing home buyers than homes for sale. In fact, the Federal Home Loan Mortgage Corporation (Freddie Mac) reports that there are 3.8 million fewer homes than needed in the United States. In other words, we’re in a seller’s market.
Competition for buying homes is stiff, which means this is no time for financial missteps. To help you avoid the typical blunders would-be home buyers make when applying for mortgages and making offers on homes, we’ve asked some expert Realtors and mortgage lenders to share their tips about the financial things you shouldn’t do if you want to buy a house this year.
Don’t Upset Your Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is your monthly debts (mortgage or rent, car payment, credit cards, student loans, and other debts) divided by your monthly income. “If you’re thinking about buying a house this year, you will want to pay special attention to your finances to get the best shot at getting preapproved for a mortgage,” advises Tyler Forte, CEO of Felix Homes in Nashville, Tennessee. “There are a lot of misconceptions about what lenders consider; however, the primary factor is your debt-to-income ratio.” He warns against taking on new debt, such as a student loan. “Also, avoid any shopping sprees using your credit card that you do not intend to pay down.”
His advice is seconded by Melissa Cohn, executive mortgage banker at William Raveis Mortgage. She too advises potential home buyers to minimize expenses and avoid looking for other loans right now. “So keep driving the old car—wait until you close to buy or lease a new car, or even to buy furniture, because banks do check your credit just before closing.”
Don’t Forget to Work on Your Credit Score
Your debt-to-income ratio is not the same as your credit utilization ratio. The latter refers to how much credit you’re using divided by the amount of credit available to you. For example, if the total of all the limits on your credit cards is $50,000 and your total balance is $25,000, then your credit utilization ratio is 50 percent.
Credit utilization can account for 30 percent of your credit score, and next to your payment history, it’s the most important factor in determining your score. “When you plan on purchasing a home in the next year or so, it is not a good idea to make purchases that will have a detrimental effect on your credit score,” warns agent Christopher Totaro at Warburg Realty in New York City. “When you’re financing the purchase of a home, your credit score is a huge factor when a bank is determining your interest rate.”
And here’s something else to think about: According to Greg Kurzner, president/broker at Resideum in Alpharetta, Georgia, you shouldn’t be using your credit cards for points and perks when you could be using cash instead. “If your usage of your credit limit is above 10 percent, your score suffers—and the higher the balance is compared to the limit, the bigger the impact.” Don’t let the temptation to rack up those credit card points keep you from getting approved for a house.
In addition, Kurzner says, although this may be obvious, “Don’t let your payments slip, and don’t be late on bills—or, God forbid, file bankruptcy.”
Don’t Let Banks Ruin Your Chance of Getting a Mortgage
You’ve probably read a lot about the importance of protecting your credit score. But did you know that having too many credit inquiries while you’re shopping around for a mortgage can negatively impact your score? “Don’t let every bank you speak to run your credit—you should offer banks the credit score that you see yourself online,” Cohn says. She admits that score may not be entirely accurate but says it’s good enough for a lender to quote you a rate.
“Even if several credit pulls may not lower your credit score, banks will want to know why you didn’t apply at the earlier banks and question your ability to get approved,” Cohn explains. “Find the lender with the best rate, make that application, and let that lender run your credit.”
Don’t Take Job Changes Lightly
Changing jobs is usually an exciting prospect, but you don’t want too much excitement when you’re trying to buy a house. “When you are ready to buy a home and look for a mortgage, it is crucial to make the best possible presentation to a bank,” Cohn says. Your income needs to be as stable as possible, so she warns against starting a new job in the middle of the home-buying process. “If you do [start a new job], then you will have to wait until you are employed at your new job for 30 days and can show your first pay stub.” And here’s something else to consider: “If you rely on a bonus to qualify, then you will need to be in that new job for 2 years before you can use it,” she says.
How seriously a lender will view a job change will depend on your situation. For example, Forte notes that changing jobs within the same sector should be fine. “If you are a software developer at Company A and decide to accept a job as a software developer at Company B, that is OK,” he explains. “However, you’ll want to avoid a career change, such as switching from a software developer to a chef.”
Don’t Ignore Inconsistent Personal Information
This is also a good time to ensure that your personal information is consistent. “Does the address on your driver’s license match the address on your tax returns, bank statements, and pay stubs?” asks Cohn. “If not, then you should try to change as many addresses as possible to the one where you sleep at night.” Making these changes now will lead to fewer questions for the lender and create less confusion.
Don’t Sign a Long-Term Lease
If you’re currently renting, you can often get a better rate when you sign a long-term lease. But Kurzner advises against doing this if you plan to buy a house this year. “Even if it contains a stipulation allowing you to terminate your lease early, it isn’t a good idea to contractually lock yourself into a lease if you are going to move and buy,” he says. “Most places will consider month-to-month, and it might be worth the extra rent per month to be able to move when you want.”
Don’t Co-Sign for Others
If you’re trying to purchase a house, think twice about assuming responsibility for someone else’s loan. “Don’t co-sign or guarantee other people’s loans, car payments…as your lender might feel that your liability exposure from these obligations could impact your ability to pay a new loan,” Kurzner warns. In addition, if the borrower is late on their payments, because you are the co-signer, your credit will also reflect late (or missed) payments.
Don’t Get Sloppy With non-W-2 Income
Income from an employer is easy to document and explain. But you can get a mortgage even as a freelancer or business owner as long as you follow the rules regarding other types of income. “If you own a small business, or get some or a lot of your total income from partnerships or other ‘non-W-2’ income, make sure you properly take those monies as owner draws and that those draws are correctly noted on your K-1’s,” Kurzner explains.
“Newer bank underwriting guidelines want to see income flowing to you instead of it perhaps staying in whatever company you own, and if your tax returns don’t show you took owner draws, that income can’t be counted, no matter what it says on the first page of your 1040 tax return.”
Don’t Go It Alone
Enlisting help can make the home buying process flow smoothly and relieve some of the stress of buying in a seller’s market. “Working with a local and experienced Realtor who is connected in your desired location can help you find pocket listings, get you into upcoming listings before they go public, and notify you of other potential unlisted opportunities,” says Chris Fajkos, a Realtor at Tahoe Mountain Realty in Truckee, California. “A Realtor can provide virtual tours and guidance on proven negotiation tactics for your specific location.” Looking for a house can be a stressful, time-consuming process. Make sure you have someone you trust in your corner.