Things Not to Do Before Purchasing a Home

Debt-to-Income Ratios and Car Payments

You see, when determining your ability to qualify for a mortgage, a lender looks at what is called your "debt-to-income" ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and….
…car payments.

How a New Car Payment Reduces Your Purchase Price

For example, suppose you earn $5000 a month and you have a car payment of $400. Using an interest rate of 8.0%, you would qualify for approximately $55,000 less than if you did not have the car payment.
Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender.
Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down. You provide your income and may even supply pay stubs and W2 forms. The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).
However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well being.
Do not buy the car. Buy the house first.

No Major Purchase of Any Kind

Review the article titled, "Don’t Buy a Car," and apply it to any major purchase that would create debt of any kind. This includes furniture, appliances, electronic equipment, jewelry, vacations, expensive weddings…
…and automobiles, of course.

Don’t Move Money Around

When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for the lender to properly document.
So leave your money where it is until you talk to a loan officer.
Oh…don’t change banks, either.

Choosing Between Mortgages

One of the most critical aspects to the process of purchasing a home, besides choosing the actual home, is deciding which type of mortgage will best suit the consumer. Most mortgages are made for 15 or 30 year loans. That can be a long time to be tied down to a payment. The loan applicant will need to take into consideration how much money they can qualify to borrow, how much they have to set aside for payments and whether they are comfortable taking a risk with a variable interest rate loan.
Many consumers want the reassurance they will be able to access the lowest interest rates at all times. A fixed rate mortgage will not allow this. With a fixed rate mortgage, the interest rate remains at whatever the prime rate was when the loan was originated, for the duration of the loan; even if that is 30 years. A variable rate mortgage loan offers more flexibility but also more risk. With a variable interest rate loan, the consumer will be able to take advantage of lower interest rates if the prime rate falls. This can be a substantial amount of savings over the course of the loan. There is a risk, however that the prime rate will rise, which means the homeowner will be paying more money in interest on the mortgage loan. The fixed rate consumer does not have this concern.
There is a compromise between the fixed rate mortgage loan and the variable rate mortgage loan. A capped loan allows consumers to access lower interest rates if they become available, but protects them from high interest rates above a certain limit. Another compromise is a discounted mortgage. In this type of mortgage loan, the consumer takes out a mortgage for a variable interest rate loan. While the interest rate will fluctuate in accordance with the current prime, the interest rate the consumer pays will always remain a certain number of points below whatever the current prime rate is.
While it is important for the consumer to shop around for the best interest rate, the lowest interest rate is not always the best. Lenders, like other companies, rely on competition and advertising for their business. Some banks and lending institutions will advertise a phenomenally low interest rate in order to attract prospective borrowers. The interest rate may be as much as a few points below what other lenders have offered. Consumers should be aware, however that this low interest rate may come with a high price tag. In order to makeup for the lost revenue of the low interest rate, lenders will include restrictions and penalties in the terms of the loan. Frequent restrictions included limiting the attractive low interest rate to only a portion of the entire length of the loan, such as one to three years. After that time period, the interest rate will rise to the current prime rate at the time. Another common restriction allows the lender to charge a penalty to the consumer should they decide to refinance the loan with another lender at a later point in time. The penalty is often so cumbersome it makes the savings of refinancing minimal.
Finally, lenders may try to make up the difference by requiring the consumer to purchase home insurance through them, rather than allowing them to shop around for competitive rates. Provided there are no requirements or penalties attached to a low interest rate, it can be quite advantageous for a consumer to shop around before making a final decision on a lender.
The prospective homebuyer will also need to make a decision between a 15 year mortgage and a 30 year mortgage. Both have advantages and disadvantages.