As a prospective homebuyer, you know that once you have a lender’s preapproval in hand, it’s time to shop for a home. If you’re working with an experienced and professional Realtor®, you also know that it’s not the time to be making any other major purchases with credit.
If not, some borrowers assume that once a lender is satisfied with their financial status, they can begin making a few purchases for their soon-to-be new home.
However since 2010, Fannie Mae has required lenders to recheck a borrower’s credit right before closing a mortgage. If new liabilities pop up, the loan may be delayed or even canceled.
Herm Hoge, broker/owner with his wife Kris of RE/MAX Realty Associates in Munster, experienced this with one of his listings.
“We were three days away from closing so my seller was already packed and moved out,” he explained. “Then, we hear the closing has been delayed. Needless to say this was not good news. The buyer apparently was shopping for a new television and stereo system and got talked into a 0 percent financing deal with no payments for year. That’s all it took to derail things. We were able to close two and a half weeks later after the buyer had a family member pay off the electronics purchase and gift it to him. We were lucky.”
Moral of the story: buyers waiting to close on a mortgage should avoid doing anything that might change their credit picture until after the documents are signed and the money is delivered.
“I always tell my clients about this upfront during an introductory presentation that focuses on the entire home buying process,” said Manny Hernandez, leader of the Classic Dream Realty Team at RE/MAX Realty Associates. “I started out in this business doing mortgages and made the transition to real estate because so many of my clients asked me to help them out when buying a house. When the mortgage industry changed so dramatically in 2007, I chose to use my real estate license full time.
"I’ve been fortunate that my business has grown every year, and I attribute that to my knowledge of the mortgage industry. I learned how important it is to educate the client. But, unfortunately, I do still hear stories about people buying furniture or even a car – things they probably shouldn’t be buying anyway if owning a home is their priority right now – and not being able to close their loan when the time comes.”
While it seems reasonable to want to get that new flat-screen TV, stereo system, bed or refrigerator in time for move-in day, it’s important to avoid even the best of the best deals – since you may risk losing out on your dream home at the last minute.
That’s because most of these new purchases will show up when a new credit report is pulled, and the loan could be sent back to underwriting. If that’s the case, a new loan could potentially have a higher interest rate, further affecting debt-to-income ratios.
Also keep in mind that too many new credit inquiries – from car dealers to electronics and home retailers – can be another red flag.
While a few reasonable purchases right before closing may not affect the loan status of the most creditworthy borrowers, those with tighter finances - high debt-to-income ratios - need to be especially careful since the maximum debt-to-income ratio allowed by Fannie Mae is 45 percent (meaning that a maximum 45 percent of your gross monthly income can go to cover debt, mortgage and housing expenses).
Ultimately, the best way to avoid any last-minute problems would be for all borrowers to check with their lender before taking on any new debt.
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