Preparing Your Finances for the Purchase of a Home

No Major Purchases

Do not make any major purchases that will create debt including a car, furniture  appliances, electronics, jewelry, vacations, weddings, etc.  Be conservative with your money and don’t make frivolous purchases.  As tempting as it may be to spend money once you have some saved, remember that home buying is likely the most important purchase you will make so be cautious in your spending.  Don’t spend more money on entertainment or dining out or buy expensive clothing.

Do Not Move Your Money Around

When applying for a loan the lender will be concerned about the ability to pay for the down payment and closing costs and you will be asked to provide financial statements for the 2-3 months prior regarding your liquid assets including checking accounts, savings account, money market funds, certificates of deposits, stocks, mutual funds, 401K and retirement savings.

If you are moving money in these accounts around there may be large deposits or withdrawals.  The mortgage personnel who will approve the loan, the mortgage underwriter will require a comprehensive paper trail of all withdrawals and deposits and you may be asked to produce cancelled checks, deposit receipts and other data and the process can be tedious and time-consuming.

To eliminate the possibility of fraud and ensure quality control you are required to document the source of all funds and moving money around can make it more difficult for the lender to document.  Even if you are just moving money to consolidate your accounts, you should leave it where it is until after speaking to a lender.  Stay with your bank, you should not switch bank prior to applying for a mortgage loan.

Changing Employers

Changing jobs will be unlikely to affect you eligibility for a mortgage loan particularly if you are getting a pay increase.  For some home buyers  however, the effects can be disastrous.

Is you are on salary and do not earn any additional income from commissions, bonuses, or over-time, it should not be a problem to switch employers as long as you stay in the same line of work.  If you are paid in hourly wages and work 40 hr weeks without overtime, switching jobs should not affect your mortgage loan.

However, if a significant portion of your income is through commissions do not change jobs prior to purchasing a home.  Mortgage lenders average your commissions over the last two years and changing employers will create uncertainty about your future income because there is no history to create an average.  Even if the commission structure and product sold is the same, the underwriter will still have questions about whether or not your future income will mirror the last.  This is a case in which changing jobs will be a detriment to your ability to purchase a property.

If a substantial portion of your income is from bonuses you may want to consider changing jobs as mortgage lenders are unlikely to consider future bonuses as income unless the last two years have shown a consistent record of receiving them.  If you have been at the job for 2+ years and have consistently received bonuses, the lender will average them over the last two years in determining your income.  As is the case with commission, if you change employers you will not have the two-years income history to count the bonuses as income.

If you rarely work 4o hours a week do not change jobs.  There will be no way to accurately predict how many hours you will work on the new job and thus no way to determine income.  If you remain with your current employer the lender an average those earnings.

Because overtime wages vary between employers, overtime income cannot be predicted if you switch employment.  If you stay with you current employer you will receive credit from your lender for overtime and they will determine overtime over the last few years and come up with a monthly average.

DO NOT switch to self-employment prior to purchasing a new home.  Buy the home and then switch.  Lenders want the two-year income history and self-employed individuals have a lot of expenses on Schedule C on tax returns particularly so in the beginning years of self-employment.  This minimizes your IRS tax obligation but also your income to qualify for a mortgage loan.  Similarly, do not change your business from a sole proprietorship to a partnership or corporation until after purchasing a home.

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