Make One Move at a Time
There are many accomplishments in life worth celebrating. Buying your own home is certainly one of them, just like purchasing a brand-new car, being approved for another credit card or getting a better job. So if you could do all four of these things at the same time, that would be even better, right?
Actually, no. Buying a new car, getting a new credit card and starting a new job will all delay the processing of your mortgage application, and any one of them could even cause the home purchase agreement to fall through. As strange as it sounds, there are important reasons to put off doing these three things until after closing.
1. A New Car
The car purchase is the easiest to explain, because it is, after all, a huge expense you are putting on yourself. It would be very hard to pay for a new car in cash and then still have enough leftover to cover the down payment on a house and the closing costs of a mortgage. And don’t even think about trying to get an auto loan and a home loan at the same time — your mortgage lender will not appreciate it!
There are two reasons getting an auto loan hurts your ability to qualify for a mortgage:
- It raises your debt-to-income ratio, which decreases how much of your monthly income can go toward your housing expenses.
- It lowers your credit score, which could increase the interest rate on your mortgage.
Even if you’re sure you can handle a new car payment and a new mortgage payment at the same time, your lender still has to do the math all over again, because all monthly recurring debts count against your gross monthly income. With less income for a monthly payment, you may end up qualifying for a smaller home loan.
In the long run, an auto loan can be good for your credit, as long as you make all your payments on time. Immediately after you get the loan, however, it will make your credit score drop substantially.
Even if your mortgage lender already preapproved you, they will pull your credit again right before closing, so your interest rate may change if your credit score has changed. A higher interest rate means a higher monthly payment, which could very well reduce the loan amount you can get.
If your home loan suddenly gets smaller because of extra debt or a higher interest rate, your down payment will have to suddenly get bigger if you want to go through with buying the home.
2. A New Credit Card
So buying a new car in the middle of a mortgage application is obviously a bad move, but what’s wrong with getting a new credit card?
It’s true that if you get a new line of credit and you don’t use it at all, that increases your total credit availability and decreases your overall credit usage. In the long run, this is actually a great way to improve your credit score, and it’s something to consider doing when you are first starting to think about buying a home.
What’s problematic for your mortgage application is the timing. If your mortgage lender pulls your credit report before closing and they are surprised to find a whole new credit account has sprung into existence, it will throw a wrench into the gears of the mortgage machine. Even though it might not affect the terms of your mortgage, the delay itself could cost you.
Once you have your new home picked out and the seller has accepted you offer, you must make sure you close the deal on time. If you miss the closing date because of a processing delay, the consequences could be very expensive:
- If you have hired any moving services, they will have to be rescheduled.
- If you need to vacate your current residence before the new closing date, you will have to find a place to stay and storage for your furniture in the interim.
- If your mortgage rate lock expires, your interest rate could go up.
- If the seller is impatient, they could walk away from the deal and find another buyer.
Given these risks, putting a little extra plastic in your wallet can definitely wait until after you’ve closed on your home.
3. A New Job
We’ve established that buying a new car is bad because it messes up your debt-to-income ratio and your credit score. Opening up a new line of credit is risky because it will delay the processing of your mortgage. But what could possibly be bad about landing a better job?
Let’s say in the middle of buying a new home, you get a job offer that will boost your income by 20 percent, and you jump on it. After all, this will improve your debt-to-income ratio, and it shouldn’t have any immediate effect on your credit score. But there’s one small problem and one potentially large problem with rushing into a job, even if it’s a higher paying one.
As before, the small problem is timing. Because the source of your income has changed, your mortgage lender needs to verify it all over again, which means you need to submit another 30 days’ worth of pay stubs. That’s a one-month delay right there!
The larger problem can arise if you’re making a drastic career change. When your mortgage lender looks at your income, it’s not just the amount of money you’re getting that matters — your lender wants to see stability, too. Ideally, you must show that you have been earning a steady income from the same line of work for at least the past two years.
If you had been working as a line cook at a steakhouse and then recently became the head chef of a bar and grill, that’s no big deal, because that’s effectively just a promotion for you. But if you got preapproved for a mortgage as a line cook and then two weeks before closing you announce that you’ve become a cyber security expert, that may give your lender pause.
It won’t necessarily derail the whole deal, but you will have some explaining to do. Maybe you’ve been a part-time college student all along and you got this job because you finally finished your computer science degree. If that’s the case, then it might not be a problem. However, it would be so much simpler for everyone if you just asked your new employer to set your start date for the week after you close on your home!
There’s a time for everything, and when it comes to new cars, new credit cards and new jobs, the time to get them is either before you start looking for your new home or after you’ve already closed on it.