Before You Househunt
Don’t Move Money Around
When lenders review 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 approves your loan) usually requires a complete paper trail of all withdrawals and deposits. You may be required to produce canceled checks, deposit receipts, and other seemingly inconsequential data, which can get quite tedious.
You may feel annoyed with your mortgage broker, but he or she is only doing their job as required. To ensure quality control and eliminate potential fraud, it is a obligatory on most loans to 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 your activities.
So leave your money where it is until you talk to a loan officer. And don’t switch banks, either.
What If I Change Jobs?
For most people, changing employers will not affect their ability to qualify for a home loan, especially if they are going to be earning more money. For some buyers, however, the effects of changing jobs can be disastrous to the loan application.
Salaried Employees
If you are a salaried employee who does not earn additional income from commissions, bonuses, or overtime, switching employers should not create a problem. Just make sure you remain in the same general 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 overtime, 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 will negatively impact your ability to buy a home.
Bonuses
If a substantial portion of your income on a new job will come from bonuses, try to delay an employment change until after you have purchased a home. 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. They will then average your bonuses over the last two years to calculate 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 at the current job, the lender can just average your earnings.
Overtime
Since employers award overtime hours differently, your overtime income cannot be determined if you change jobs. If you at your present job, lenders will count your 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 deduct 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 adjusted gross income, the figure lenders use to determine whether you 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 Purchases and No New Credit!
Delay leasing or buying a new car, unless you ae paying for the vehicle in cash. (And if you are paying cash, do not deplete your reserves significantly!) Lenders will hold the debt against you. When determining your ability to qualify for a mortgage, lenders look at your “debt-to-income ratio.” The debt-to-income ratio is the percentage of gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, like credit cards, as well as student loans. Suppose you earn $5000 a month and you have a car payment of $400. Assuming an interest rate of eight percent on a thirty-year fixed-rate home loan, you would qualify for approximately $55,000 less than if you did not have the car payment.
So if you haven’t already bought that new car, remember one thing: Buying a home is a much more important purchase when considering your future. Be patient.
Do not apply for new credit in the form of credit cards or other loans as you prepare to househunt. For the cleanest credit report, make sure you are current on all payments on any debts you have, and that you have not taken on any new debt, or opened any new credit accounts, in at least six months.