Things to Avoid Before Purchasing a Home
Don’t Move Money Around
When a lender reviews your loan package for approval, one of the things
they are concerned about is the source of funds for your down payment
and closing costs. Most likely, you will be asked to provide statements
for the last two or three months on any of your liquid assets. This includes
checking accounts, savings accounts, money market funds, certificates
of deposit, stock statements, mutual funds, and even your company 401K
and retirement accounts.
If you have been moving money between accounts during that time, there
may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan)
will probably require a complete paper trail of all the withdrawals and
deposits. You may be required to produce cancelled checks, deposit receipts,
and other seemingly inconsequential data, which could get quite tedious.
Perhaps you become exasperated at your lender, but they are only doing
their job correctly. To ensure quality control and eliminate potential
fraud, it is a requirement on most loans to completely document the source
of all funds. Moving your money around, even if you are consolidating
your funds to make it "easier," could make it more difficult
for the lender to properly document.
So leave your money where it is until you talk to a loan officer.
Oh…don’t change banks, either.
The Effect of Changing Jobs
For most people, changing employers will not really affect your ability
to qualify for a mortgage loan, especially if you are going to be earning
more money. For some homebuyers, however, the effects of changing jobs
can be disastrous to your loan application.
How Changing Jobs Affects Buying a Home
Salaried Employees
If you are a salaried employee who does not earn additional
income from commissions, bonuses, or over-time, switching employers
should not create a problem. Just make sure to remain in the same line
of work. Hopefully, you will be earning a higher salary, which will
help you better qualify for a mortgage.
Hourly Employees
If your income is based on hourly wages and you work a straight forty
hours a week without over-time, changing jobs should not create any
problems.
Commissioned Employees
If a substantial portion of your income is derived from commissions,
you should not change jobs before buying a home. This has to do with
how mortgage lenders calculate your income. They average your commissions
over the last two years.
Changing employers creates an uncertainty about your future earnings
from commissions. There is no track record from which to produce an
average. Even if you are selling the same type of product with essentially
the same commission structure, the underwriter cannot be certain that
past earnings will accurately reflect future earnings.
Changing jobs would negatively impact your ability to buy a home.
Bonuses
If a substantial portion of your income on the new job will come from
bonuses, you may want to consider delaying an employment change. Mortgage
lenders will rarely consider future bonuses as income unless you have
been on the same job for two years and have a track record of receiving
those bonuses. Then they will average your bonuses over the last two
years in calculating your income.
Changing employers means that you do not have the two-year track record
necessary to count bonuses as income.
Part-Time Employees
If you earn an hourly income but rarely work forty hours a week, you
should not change jobs. There would be no way to tell how many hours
you will work each week on the new job, so no way to accurately calculate
your income. If you remain on the old job, the lender can just average
your earnings.
Over-Time
Since all employers award overtime hours differently, your overtime
income cannot be determined if you change jobs. If you stay on your
present job, your lender will give you credit for overtime income. They
will determine your overtime earnings over the last two years, then
calculate a monthly average.
Self-Employment
If you are considering a change to self-employment before buying a new
home, don’t do it. Buy the home first.
Lenders like to see a two-year track record of self-employment income
when approving a loan. Plus, self-employed individuals tend to include
a lot of expenses on the Schedule C of their tax returns, especially
in the early years of self-employment. While this minimizes your tax
obligation to the IRS, it also minimizes your income to qualify for
a home loan.
If you are considering changing your business from a sole proprietorship
to a partnership or corporation, you should also delay that until you
purchase your new home.
No Major Purchase of Any Kind
Review the article title "Don’t Buy a Car," and apply
it to any major purchase that would create debt of any kind. This includes
furniture, appliances, electronic equipment, jewelry, vacations, expensive
weddings…
…and automobiles, of course.
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