I didn’t come up with the above “10 Commandments of Buying a Home”, but after over 20 years in mortgage lending I agree with these things completely. If you break one of these 10 commandments it is extremely likely that you could lose your dream home. For me, I don’t settle for just knowing what I should or should not do….I want to know WHY. I bet you feel the same way. You want to know why you shouldn’t do the above things.
Here is the WHY behind the WHAT NOT TO DO so you don’t lose your dream home!
Thou shalt not change jobs, become self-employed, or quit your job. I think everyone understands that they should not quit their job if they are buying a home, but this also holds true if it is your spouse buying a home – if you are also on the loan. This is because while you may not think your income is that important in your budget, it could be vital to your loan approval. What you count as your income is generally based on what you make or take home. What the lender can count is based on very specific guidelines and may or may not be what you actually take home at this point. Lenders have to prove stability and continuance of income. They have to show that your income will continue for at least three years before they can count it as qualifying income for your loan.
Here is a scenario, Jack and Jill are married and they buying a house together. Jack graduated from college about two years ago and took a great job in his field (this part is important since he doesn’t have a two-year history of working). Jack gets paid a base salary plus commissions. At the time of applying for the loan, Jack had not been on the job for two years and had only filed tax returns for one year with his present job. When Jack first started he only received his base pay. He started earning his bonus 90 days later. Jack has done well on his job and his bonus has grown substantially over the past 18 months. However, the bonus has fluctuated during his tenure, but Jack is on track now and his bonus is steadily increasing. Jill also graduated from college about two years ago. When she and Jack got married she had grand plans of opening her own business. Because of the cost of living, Jill shelved her dreams and got a job with a steady income. Jill is paid hourly and as Jack’s income has been increasing and seems stable, she has been cutting back on her hours and working part-time on her business. Jill hasn’t reported any income through her Federal tax returns for this business yet.
Since Jack does not have a two-year work history the lender can only count Jack’s income since he got a job in his field (they are actually considering his time getting his degree as part of his overall work history in the field to show stability). In addition, since the bonus has not been received for two years and it isn’t steady or guaranteed, the lender can’t use that income to qualify either.
Given the house that Jack and Jill are buying, the lender needs income from both Jack and Jill in order to meet the Ability to Repay (aka ATR) and Qualifying Mortgage (aka QM) guidelines – learn more about ATR/QM here ). So if Jill quits her job to open her own business, hitting all of the shalt nots in this commandment, then there is not enough qualifying income for the loan and Jack and Jill will not get their home. While Jack might make enough for their budget, qualifying is not about your take home pay and is more about the income that can be counted. Now, that is not to say that your take-home pay doesn’t matter. It does. You need to know that you can afford the house payment. It doesn’t matter what the lender can approve you for if you can’t make the payments.
If Jack decides to take a promotion to another sales role at the same company that pays more, this could be a problem. “It pays more” is subjective. It could be that Jack is taking over a position with an established territory and that role has traditionally paid more than Jack currently makes. However, Jack’s new role is 100% commission and his pay is only guaranteed for 90 days while he makes the transition. Since Jack has no history in this role and no history of being on 100% commission, this will dash his dreams of owning a new home because there will be no income for the lender to use.
There are many more scenarios I could share with you…..all from real life, but I think you get the idea. Don’t change jobs, become self-employed or quit your job while you’re trying to buy a new home. If in doubt, call your loan officer and ask first!
Thou shalt not buy a car, truck or van (or you may be living in it)!! This goes back to income as well. Debt to income ratios (DTI) are important to qualifying. Your DTI is calculated by taking the sum total of your monthly payments on your debts and diving that by your qualifying monthly income. If you have debts of $1,000 (and this number for debts includes your new house payment) and income of $2,000 then you have a 50% DTI. Since income is calculated pre-tax (before you pay your taxes), then you can see where a 50% DTI would not be good. If 50% of your income is going to pay debts and then you have to pay taxes and pay for everything else like electricity, food, cell phone bills, etc. (not necessarily listed in order of importance) you can run out of money quickly! This situation is also known as being house poor.
Generally speaking, the maximum debt to income ratio is 43%. (remember to ask your loan officer about your particular situation; some loan programs will allow for higher DTI and other programs have lower DTI requirements). If your qualifying income puts you close to 43%, a new car could wipe you out from qualifying. And then you might be living in that new car you bought!
For whatever reason, new houses and new cars seem to go hand in hand. If you are thinking about buying a new car while you are buying a house, STOP NOW. Put down the pen and call your loan officer first.
Thou shalt not use credit cards excessively or let current accounts fall behind. Lenders are required on most loans to check your credit again just before closing to see if anything has changed. Don’t worry, it’s not a new credit report so it won’t impact your credit score (read more about credit here and credit scores here ). It can however impact your loan. If you have charged a lot of new debt onto your credit cards then it can impact your debt to income ratio, if you are going to pay it monthly as a higher balance has a higher payment, or your available cash, if you are going to pay the new charges off within 30 days.
You also need to pay all of your bills on time. Credit reports aren’t good forever; they are generally good for 120 days from the date they are pulled. So if your lender pulls your credit report on the first day of a month and you spend 90 days searching for your new home, you then only have 30 days to close before that credit report expires and the lender must pull a new one. While 120 days is plenty of time for many situations, it isn’t enough time for all situations. Think about how long it takes to build a new house from the ground up. Of if you spend more time finding the right home, you have less time to close before a new credit report is needed. There are other situations that could require a new credit report to be needed. If the lender has to pull a new credit report and you haven’t paid your bills on time since the last time they pulled your report, it is unlikely they will be able to approve your loan as most loan programs don’t want to see current past due accounts or any late payments in the last 12 months. *
That’s a lot of detailed mortgage minutia for one post. As such, we will take this in parts (if you want to make sure you see the next piece in this series, you can sign up in the floating toolbar on the left or email me and I will make sure you get the link)
Join us next time as we explore more in the world of mortgage lending. If you have a burning question or just want to chat — I love to be social……you can reach me on Twitter (@ChrisEllaLoans), Snapchat (ChrisElla2), CyberDust (ChrisElla), email ChristyS@StarkeyMtg.com, at the office at 912.721.9400, and my website at www.LoansWithChristy.com. Find out more about me and more ways we can network (Facebook, Instagram, Twitter) at www.about.me/chrisella
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*this paragraph does not explain the guidelines for all loans. There are many, many situations and I can’t describe all of them here. Our guidelines are many hundreds of pages. If you have a specific question about your credit, please don’t hesitate to call.
Christy Soukhamneut, Area Manager
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