A mortgage is a major financial commitment. In order to ensure that you can afford the loan, a detailed review of your financial status will be part of the underwriting process. If you make a big purchase during the process, that could derail your mortgage application.
Let’s examine what constitutes a major purchase in the underwriting process so that you don’t compromise your aspirations to become a homeowner.
Thank you for taking the exciting step towards becoming a homeowner! You may be wondering, “Can I spend money before closing on my mortgage?” The answer is a little complicated, but knowing what to look out for will help you secure your dream home without any last-minute hiccups.
Understanding the Pre-Closing Period: A Delicate Balance
Lenders carefully examine your financial stability during the pre-closing phase to make sure you can afford to repay the loan. Any notable changes to your financial circumstances during this time may cause concerns and risk the approval of your mortgage.
What Constitutes a “Big Purchase” During Underwriting?
While the definition of a “big purchase” can vary depending on your individual circumstances and lender’s policies. here are some general guidelines to keep in mind:
- Large Purchases: Avoid major purchases like cars, furniture, appliances, or anything requiring financing. These can significantly impact your debt-to-income ratio (DTI), a crucial factor in loan approval.
- Credit Card Usage: Even if you can afford it, refrain from using your credit cards extensively. High credit utilization can negatively impact your credit score, which plays a significant role in determining your interest rate and loan terms.
- Cash Outlays: Be mindful of large cash outlays that deplete your reserves. Lenders want to see a healthy emergency fund to demonstrate your ability to handle unexpected expenses and maintain consistent mortgage payments.
Why Can’t I Spend Money After Pre-Approval?
Even if you’ve received pre-approval it’s crucial to remember that it’s conditional. Lenders can withdraw their approval if your financial situation changes significantly before closing. This is because the pre-approval is based on the information you provided at that time and any deviations can raise concerns about your ability to repay the loan.
Navigating the Pre-Closing Period: Tips for a Smooth Closing
To ensure a smooth closing process here are some valuable tips to keep in mind:
- Maintain Financial Stability: Avoid taking on new debt, opening new credit lines, or making large purchases.
- Monitor Your Credit: Regularly check your credit score and report any errors to maintain a healthy credit history.
- Communicate with Your Lender: Inform your lender about any anticipated changes in your financial situation, such as a job change or unexpected expenses.
- Stay Organized: Keep track of all your financial documents and be prepared to provide them to your lender upon request.
Frequently Asked Questions (FAQs)
1. Can I use my credit card for everyday expenses before closing?
You can use your credit card to pay for regular expenses, but you must maintain a low credit utilization rate. Try to pay off your debt in full each month to keep your credit score high and prevent interest charges.
2. What happens if I make a large purchase before closing?
Making a large purchase before closing can potentially jeopardize your mortgage approval. If the purchase significantly impacts your DTI or credit score, the lender might reconsider their decision.
3. Can I get a mortgage if I have bad credit?
Even though it could be more difficult, getting a mortgage with poor credit is still possible. Several lenders specialize in working with borrowers with less-than-perfect credit. However, you might face higher interest rates or stricter loan terms.
4. What are some additional tips for a smooth closing?
- Get pre-approved for a mortgage early in the process.
- Shop around for the best mortgage rates and terms.
- Choose a reputable lender with a proven track record.
- Be prepared to provide all necessary documentation to your lender.
- Ask questions and clarify any doubts you may have.
5. What are some resources that can help me with the mortgage process?
- Government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac: These organizations provide information and resources on the mortgage process.
- Housing and Urban Development (HUD): HUD offers counseling and assistance to first-time homebuyers.
- Non-profit organizations: Several non-profit organizations provide financial education and counseling services.
By understanding the potential pitfalls of spending money before closing and following the tips outlined above, you can increase your chances of a smooth and successful closing. Remember, open communication with your lender and responsible financial management are key to securing your dream home without any last-minute surprises.
What Is Considered A Large Purchase Before Closing?
A significant purchase that raises your debt-to-income (DTI) ratio or depletes your cash reserves may be sufficient to have your mortgage application denied by your lender. Ideally, you should make every effort to prevent any changes to your financial statistics in the days preceding closing.
What then constitutes a major purchase? Purchasing a car in the days preceding closing, whether or not financing is involved, is one example. But anything that changes your financial picture in a big way should wait until after closing.
While what constitutes a “big purchase” will depend on your spending limit, try to avoid making any purchases that you have to finance. Even if you can make the purchase in cash, itâs good to hold off until after closing. Otherwise, the purchase will affect your cash reserves.
How To Determine If A Purchase Will Be Considered Major By Your Lender
Whether a purchase will be considered major by the lender varies based on your situation. Hereâs when a purchase might be a dealbreaker for your lender.
When you take on a mortgage, you are assuming a big debt. With that, it makes sense that lenders take your DTI ratio very seriously.
In fact, most lenders set a limit on how high your DTI ratio can be. In most cases, that limit is 43%. A DTI ratio higher than that would make you ineligible for most conventional conforming loans.
Not sure what your DTI ratio is? Itâs easy to calculate. Add up your monthly debt obligations, then divide that sum by your gross monthly income. If a purchase changes your DTI ratio, that will likely affect your mortgage application. Depending on the change, a lender may even deny your mortgage purchase.
Try to postpone taking on new debt until after the closing if you are considering doing so. Otherwise, the lender may deny your application altogether.
Credit utilization is another important factor in the underwriting process. Essentially, your credit utilization reflects how much of your available credit you use.
For example, letâs say you have a credit card with a $10,000 limit. If you have a balance of $5,000, then your credit utilization would be 50%. Typically, a higher credit utilization score will cause your credit score to drop.
Itâs also possible to see your credit score dropped after a big purchase. Thatâs because a new credit account can make it more difficult to keep up with your loan obligations. If you increase your credit utilization for open new credit accounts, that could negatively impact your loan application.
An emergency fund can help you cover unexpected expenses. As a new homeowner, expenses are likely to pop up as you settle into your new home.
Lenders want borrowers to have some reserves on hand to cover unexpected expenses. Plus, a robust emergency fund can help you continue making mortgage payments even if you lose your job.
Therefore, if you need to use emergency money to pay for a purchase, your loan application may not be approved by a lender.