It’s common advice, but if you are in the market looking for a home you want to be extra diligent when it comes to your finances and purchases. Specifically, you want to avoid anything that will lower your liquid asset value or alter your debt to income ratio. Your upcoming home loan will be unfortunately impacted by any large purchase that will increase the value of your debt and therefore change your debt to income ratio. Typically lenders like to see a debt to income ratio no higher than 35%, and ideally lower than that. Debt is considered monthly bills like housing, car payments, tuition bills and other household expenses. Adding on to that debt is to be avoided until after the closing so there is no chance your loan will be rejected. If you have a larger expense coming up, it’s best not to finance it if possible, and also be cautious about spending liquid assets if you plan to put money down on your new home; avoiding financing is key. Some common big purchases to avoid while looking for a home include:
New things for the home
It can be tempting to buy entire living room or bedroom sets with a new home, but it is recommended to wait until you are in the home to make this purchase. Brand new furniture and appliances can wait until after you’ve signed the closing papers and are ready to move in. Especially if you plan to finance these purchases, it can alter your debt to income ratio. The same goes for any new home purchase such as landscaping services or renovation loans.
Many times, new home buyers want a whole new aesthetic to their life when buying a new home so this can mean buying a new car and trading in their old one. Car payments are factored into the debt to income ratio so this is one to be avoided at all costs until after the closing. Even if you decide to trade-in your car for a similar payment, going through the paperwork could delay your loan and if you’re on a tight time schedule this may not be ideal. If you are planning on paying down your car loan or selling your car prior to closing, this could help with your debt to income ratio and this would be an appropriate time to do so.
Finding a new home can be a very exciting event and it can be tempting to want to celebrate with a much needed vacation but if you’re financing it or spending a lot of your savings to do so, this is another purchase that is best to wait on. That beachfront view will look even more beautiful when there is no chance it will alter your home loan. Plus, as you get closer to closing, it will be likely that your loan processors and realtor will need to get ahold of you regularly and this may cause your vacation to not be as restful as it could be.
If you or your child is getting ready to go back to school and thinking of taking out student or parent plus loans, this is a big one to wait on until after the closing. Of course, you may be in a time crunch for enrollment but tuition bills greatly impact the debt to income ratio and if it’s too big, your home dreams may be dashed. At the same time, if you already have student loans and are buying a home it may be a good idea to pay them down a bit if at all possible.
Do you have more questions about getting your finances in order so that you can buy a home? Are you in the market to buy or sell your home? Call and text me at (720) 323-4176 or email me at [email protected]