The 12 months leading up to a home purchase can be extremely stressful. From the preapproval process to the signature on the dotted line, it's a timeline cramped with intricate decisions that ultimately influence one of the most substantial purchases a person will make in his or her lifetime.
Some of these are more insignificant details, while others can be of major concern. However, when it comes to decisions that could completely jeopardize the opportunity altogether, there are four main things a person should avoid doing at all costs in the year leading up to a home purchase.
Changing jobs or switching banks so close to a home purchase can put the borrower at a disadvantage in the purchase process. A lender is looking for stability, so consistency in all aspects is key in assuring that the borrower is a reliable risk.
A lender will also collect pay stubs, tax returns, and bank statements — a crucial step in the preapproval process — to verify the borrower's ability to afford the loan. When a borrower suddenly changes jobs or switches banks, a lender may need to delay the process by a full month or more in order to obtain the most current documents. Especially for those nearing the end of the purchase process, this can be a major setback.
It's a seemingly natural transition for the home search to turn into a furniture search to fill the emptiness once a home is picked out. However, buying big ticket items such as a car in the months prior to a home purchase can really be a blow to one's credit.
Additionally, the purchase will increase a borrower's debt-to-income ratio, or the ratio of total monthly debt to gross monthly income, which signals that the borrower has an increasing amount of debt with a stagnant income. Especially when combined with a lower credit score, that higher debt amount makes the borrower more of a risk in the eyes of the lender.
Buyers are often urged to maintain or even improve their credit during the purchase process. One common misconception is that opening multiple new credit accounts at once will boost the score. In fact, it'll probably do the opposite.
Establishing sound credit takes time, and rushing the process will do more harm than good. Consumers are recommended to open new accounts sparingly and when needed, but this isn't the case for prospective borrowers. Due to credit inquiries, new credit accounts typically hurt a score before they help it, which is something these borrowers want to avoid altogether. Though it isn't enough to make a substantial difference in one's ability to repay a loan, it's better to be safe than sorry when it comes to credit uncertainties.
There are other ways to maintain or even improve a credit score in the midst of the purchase process. Keeping up with payments on existing credit accounts and utilizing less than 30 percent of the total spending limit helps will maintain the score, while proofing credit reports periodically for mistakes could potentially improve the score. According to a report released by U.S. PIRG, "mistakes do happen." The consumer group found that 1 in 4 credit reports contains errors serious enough for the consumer to be denied future credit or pay higher rates. A free credit report can be obtained at AnnualCreditReport.com.
First and foremost, lenders will examine all bank records because they want to ensure the borrower has the ability to save. However, they also want to ensure the borrower isn't engaging in any activity that might otherwise endanger the loan. This means any large, undocumented deposits will need to be accounted for, as they could've been the result of recent debts not necessarily reflected on a credit report. It is also not unheard of for the seller to pay the buyer cash for any deposits or closing costs and the increase the asking price by the same amount. The buyer can then purchase a house they would otherwise be unable to afford just so the seller can sell the house at a higher figure. This practice is entirely illegal, which is another reason why the lender will scrutinize the accounts very carefully. Even if it is as simple as transferring money among bank accounts, moving money during the purchase process might raise some red flags and cause delays.
Your Certificate of Eligibility (COE) verifies you meet the military service requirements for a VA loan. However, not everyone knows there are multiple ways to obtain your COE – some easier than others.
Credit score requirements vary by lender. However, most lenders have similar criteria. Let's look at the minimum credit score for a VA loan and what lenders typically expect.