Understanding Why Not To Make A Major Purchase When Trying To Get A Mortgage
Have you ever wondered why your lender, realtor or title agent will tell you not to make a large purchase that involves financing, when you are trying to buy a Home?
I get asked about this all the time. It can be a really big deal, so I thought I would shed a little light on why it is important to be thinking about the things you are doing when trying to get that mortgage you desire.
A mortgage is likely the biggest financial decision most of us will ever make. It should not be taken lightly. The choices we make can cost us tens of thousands of dollars over the life of the loan. In some cases, the choices we make can eliminate our chances of qualifying for our mortgage, at least for a period of time.
So, lets look at a couple of elements that can be big factors in the mortgage process.
First, it is important to understand that when you go to close on your mortgage, you will be signing documents that state you have not made any large purchases between the time you were approved for the loan and the closing. That by itself is a critical point. If you buy a car or finance a bunch of furniture for that new home you are buying, before you have closed on the mortgage, you could ruin your chances of actually closing on that loan and potentially lose the house and your earnest money, all because you jumped the gun on financing other things when you said you wouldn’t.
I don’t intend to go into details on that. That can be something for a later post or for you to discuss with your lender or title/closing agent.
There is also the issue of how the new debt can affect your debt to income ratio and potentially reduce the size of loan for which you can qualify, resulting in having to put more down or worst case, eliminating you from the loan you need to get the home you want. I have seen many cases where clients didn’t meet the income requirements to support the loan and missed out on getting their home.
Again, I’m not going to go into more detail on this element. This is something to discuss with your lender.
I want to focus on an example of why, from a credit standpoint, you do not want to make a major purchase that requires financing, specifically a automobile in this case, before you close on your mortgage.
Here is the skinny. I will use the purchase of an automobile as an example. We will assume for this illustration that you have an automobile that you are currently making payments on, and are trading that vehicle in on the new automobile.
When you take that car in to trade it in on the new car, the dealership will be paying off the loan on the trade-in and then starting a new loan for the new vehicle. When the existing auto loan is paid off you will suddenly lose the positive affects of having the auto loan active and in good standing. Think of that original loan as a hose of good water running into you credit garden and helping your credit scores grow. When it gets paid off the flow of good water is shut off and so your credit scores instantly are thirsty and slow down or stop their growth, depending upon the other good hoses you might have in your credit garden.
Next, the new loan is started. This new loan will take time to get to a point where you have positive payment history and it is reporting on your credit. To keep with our analogy, this hose of good water needs time to get hooked up, stretched out to your credit garden, turned on and the flow of good water needs time to reach the credit garden and start to reach the roots of the scores to help them grow again (sorry if this seems silly and overly simple, but it really is a good analogy). This time to get to where it is helping your scores is about 4-6 months.
The new loan also costs you some points on your credit to get it started. You see, the scoring algorithm has a protection for lenders built into it. Because lenders can’t see the new loan reporting right away, the scoring algorithm deducts points from your scores, making you look more risky to lend to, to make up for it.
This might not seem fair at first, but think of it this way. If I wanted to borrow money from you, it would likely be a big deal to know if I had just obtained five $10,000 credit cards. But if the cards were not reporting on my credit, you would not know anything about them, and would potentially be opening yourself up to a lot more risk than you realized. That is why the scoring algorithm deducts points from your scores. The cost of points is only short term, usually about 90 days, long enough for the new items to at least show up on your credit report.
Most people think that it is the inquiries that hurt their scores. But inquiries don’t have anything close to the affect on your scores that people think they do.
So lets look at this process all tied together. First we turned off a positive, which commonly drops our scores a little. Next we have a cost for starting a new positive, which takes about three months to recover from, and our scores drop more. Next, the new positive, in this case a loan, takes more time to get enough history to start reporting and helping scores, a time of about 4-6 months.
In all we have about a six month window where we will be in worse shape than when we started. This can be a big deal when we are trying to qualify for a mortgage. It can mean missing the minimum requirements to qualify, or can drop our scores into a less desirable interest rate window and cost us much more over the life of the loan.
I hope you understand this better now. It is important to keep this information in mind as you start to make plans to buy a home. Not only can it save you a ton of money over the life of the loan, but it can save you from losing that dream house to poor planning.
Helping people is what we do. So please let me know if you have questions or comments.
If you, or someone you know, has run into credit problems and could use a little credit help, a reputable credit restoration company like Heartland Credit Restoration is a great place to start. You will reach your credit goals much faster and safer with the help of a professional, and you will have loan ready credit.
Call me for a free consultation to see how we might be able to help. 319-533-5236.
If you are a lender or realtor that has a client you might have to turn away due to credit problems, then let me see if Heartland Credit Restoration can help change that client into a approved client with loan ready credit.
You should never have to say “NO” to a client. We can help change those into a “YES”.
Call me for a free consultation. 319-533-5236.
Don’t forget to let me know what you think. I always welcome comments. And please do me a favor and share this with your contacts on social media.
I’m looking forward to helping you.
Until then, I hope you have a wonderfully blessed day!