Why You Should Resist The Urge To Run Out And Buy New Furniture after Signing for a New Home Loan
You’ve been approved for a home loan with closing just days away. You sigh with relief thinking you are in the clear. But then your lender does a last-minute credit check and discovers that you’ve opened a new account to furnish your first home in style.
You are surprised to learn that the lender isn’t going to close on the loan. You ask, “How can this happen with the moving van packed and ready to go?” In your excitement over owning your first new home, you may not realize there’s a difference between signing the loan documents and actually closing on the loan. It’s a lot for a first-time home buyer to understand.
Getting loan approval generally comes with conditions you must satisfy before the lender agrees to lend you the money to buy a home. Your credit standing is a key consideration during the loan approval process. Therefore, any changes to your credit profile up until the final hours before closing can delay or cancel the loan.
Charging new appliances and furnishings on your credit cards changes your debt-to-income ratio (DTI). Your DTI is how much of your gross monthly income you use to pay your bills. Along with your credit score, your DTI gives the mortgage lender a general idea of your overall financial picture. This helps the lender determine whether you are able to repay the money you borrow and are a safe risk for first time home loans.
Buying furniture by adding the debt to your charge cards raises your debt-to-income ratio. A high DTI means you have more bills to pay, which could make it harder for you to make your mortgage payment on time each month.
Until you actually close on your home loan, it’s best to keep your DTI low. Most lenders like to see a DTI less than 36 percent, says the online real estate marketplace Zillow. A DTI lower than 20 percent is even better, as it can get you a lower mortgage interest rate, saving you mega bucks over the loan term.
Even if you think you are being level-headed by keeping your spending to a minimum, simply opening a new credit account can lower your credit score. This could spell trouble if the lender pulls your credit report again the day before closing. Lenders don’t like anything about your finances to change before the settlement date.
You may think you are balancing things out by closing an old credit account before opening a new account at a furniture store. But you can still get yourself in trouble.
Although closing an unused account may seem like the right move, you are lowering the amount of credit you have available, and that can drop your credit score. By eliminating one of your lines of credit, it looks like you are using more of the credit available to you. That’s a no-no when you are trying to buy a house.
Lenders also like to see credit accounts that have been established for a while. Opening new accounts may make your lender worry that you won’t have enough money to keep up with your mortgage payments. Your lender may worry more, too, if you’re young and don’t have a long credit history.
Using your savings to buy furniture isn’t a good idea either. You will need to lay out some cash at closing, so it’s best not to dip into your reserves. Your lender likely will be on top of things and check to see that the funds you need for closing are still in your bank account.
So what do you do if you want new furnishings to go with the new house you are buying? Be happy for now packing what you have, and wait until you close on the loan before you go shopping.