You finally have the home of your dreams under contract. You and the seller have agreed on home inspection repairs. Even the appraisal is done and acceptable to all parties. The lender says your credit is great and the loan is sailing through processing. You think you are home free.
Not so fast…… I’ve seen buyers blow up an otherwise slam dunk deal by doing rather innocent things.
Here are 3 things you should never do while under contract –
Do not make a major purchase on credit
I’ve seen buyers who after the initial credit report was generated thought it was fine to buy furniture on credit. Yes, the new place is larger than the old place but furnishing it now can be a deal breaker if your debt to income ratios are tight.
The lender WILL rerun credit within a week of settlement.
And let’s not talk about cars. If your car breaks down while you are under contract for a home, do not buy a new one without speaking to your lender first. That new payment could easily blow up the deal. It would be better to rent a car for a month or download the Uber app.
Do not open any new lines of credit
You receive a solicitation in the mail that if you open this new credit card you will get 100,000 miles or a free trip to the Caribbean.
Or the furniture store has a no interest, no payment for a year option so you think you can buy without hurting your debt to income ratios.
Don’t bite. Again, the lender will rerun credit the week before settlement. New credit lines are a problem.
They are doing that to make sure there has been no significant change to your financial situation. Even a new credit line you are not using or a purchase where no payments will be required for a year, will count against you. The underwriter will assume that if a new credit line was opened, it was opened for a reason and will count some minimum payment against you.
Don’t switch jobs
Even if you will be making more money at the new job, wait until after settlement to make the switch.
First, if you are switching careers, lenders will wonder if you the skill set for the new career or if you will decide after making the move that it was all a mistake. The lender sees an increased risk of loss of income when a borrower is switching careers, and may consider you a risk.
Second, there are some practical issues that could surface. Say you are a schoolteacher and you got an awesome opportunity to be a principal at another school system. You have the skill set so that is not a problem but the timing may cause a delay in settlement.
Not only will the lender rerun a credit report that week before settlement but the lender will also re verify employment. If you are not at the place you were at the time of application, they will want to know where you are. And, most importantly, will often need a paystub from the new employer to verify you actually started the new job.
So if you leave the old job before settlement and won’t start the new job before settlement and/or won’t get a paycheck at the new job before settlement, there could be a delay in settlement. A seller could consider you in default in that situation.
While there may be scenarios where switching from one salaried position to another while under contract is fine, I am aware of no situation where switching from a salaried position to a self employed position would work. Every traditional loan program I know of requires 2 years of tax returns from self employed individuals. And remember, self employed means any 1099 job like being a Realtor, a consultant and many others.
Last note on this. You will be re-signing the loan application at settlement. Of course, the credit card balances will have shifted and the bank account balance changed. If everything is within normal parameters, that is fine. But a change in employment is not normal. Signing an application that misrepresents your employment situation is called loan fraud.
Moving large sums of money: Won’t blow up the deal but if not done right, will cause massive headaches.
Do not deposit or withdraw any unusual amounts of money from your bank account while under contract. The underwriter will review 2 months of bank statements and may ask for an update prior to settlement. If there is unusual activity in your account, you will need to provide an explanation and/or a paper trail. This may not blow up the deal but it sure will create headaches for you.
How does this happen? Three quick examples:
- A couple is getting married and they get lots of cash gifts. They put it into their bank account. Don’t. Open a separate account or don’t deposit the cash until after settlement.
- Mom and Dad want to help with the purchase and give you money for the down payment. This needs to be documented as a gift. You can’t just take $10,000 and put it in your account without documenting it in detail per the lender’s guidelines.
- A family member needs some type of emergency financial help. Of course you will assist but let the lender know. Otherwise they may think that the withdraw was to pay a debt they never knew about.
I think you get the idea. Check with the lender before making any financial moves while under contract.
Of course, if your debt to income ratio is really low, buying furniture or a new car is perfectly fine. Or, perhaps a job switch will not cause a delay in settlement. However, you can’t be sure unless you ask the lender. Remember, the underwriter has all the power in approving your loan. What you think is perfectly logical may be troubling to an underwriter. So if you are going to do anything out of the ordinary from a financial perspective, ask the loan officer for permission.
The day after settlement, do what you want but while under contract get every financial move approved by the lender.
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