What Not to Do When Buying a Home Starts With the Preapproval

Every item on this list traces back to one document. Your preapproval letter tells a seller that a lender is generally willing to lend you up to a certain amount. The CFPB is direct about its limits, though: prequalification and preapproval letters are not guaranteed loan offers.[2]

Lenders differ in how much they check before they issue one. Some write a prequalification letter on information you report yourself and save the preapproval for information they have verified.[2] Either way, the letter describes your finances on the day it was written. It does not freeze them.

That is the whole idea behind this list. Between the letter and the day the loan funds, the lender looks again. Your employment gets reverified within days of signing (more on that below), and your debts get added up against your income one more time. If something you did in the meantime moved those numbers, the approval moves with them.

Get preapproved before you tour, not after

The original version of this article said it plainly: before you even begin the search for that perfect property, get pre-approved. I still agree, and I would put it first on any list of things every first-time home buyer should know. In Orange County a listing agent with a well priced house in Irvine or Costa Mesa is going to ask what is behind your offer, and a buyer without a letter is answering that question from a weak position.

Getting the letter early gives you something more useful than a number. It shows you exactly what the lender looked at, which tells you what you must not disturb.

One more detail most buyers never hear about. If a lender evaluates your credit and turns you down for a letter, it has to give you an adverse action notice, even though you never filed a formal application.[2] Read it carefully. It tells you what to fix before you try again.

Don't Overestimate What You Can Afford

Looking at homes outside your budget wastes your time and does quiet damage to your expectations. You fall for the kitchen in a house you cannot finance, and every house you can finance looks a little worse afterwards. I would rather a buyer see less on the first weekend than spend a month comparing everything to a place they were never going to own.

So run your own numbers before you sit down with a loan officer. If you are still on the fence about whether renting or buying makes more sense for you right now, this is also the exercise that settles it.

How to calculate your debt-to-income ratio

The math lenders use is the debt-to-income ratio, or DTI. The CFPB defines it as all your monthly debt payments divided by your gross monthly income, which is generally what you earn before taxes and other deductions.[1]

Add up your monthly obligations: the car payment, student loans, minimum credit card payments, any personal loan. Bills like your phone or the power company are not debt for this purpose. Then divide by your gross monthly income. The original post used a simple example that still holds: $1,500 a month in debt against $6,000 a month in income is a DTI of 25%.

That 25% does not include the house yet.

The lender adds the new housing payment to what you already owe and looks at the total. The CFPB’s own worked example does exactly that: a $1,500 mortgage payment plus $500 of auto and other monthly debts comes to $2,000, and against $6,000 of gross monthly income that is a DTI of 33 percent.[1]

What DTI do lenders actually allow?

Here the 2022 version of this post needs a correction. It said most mortgage brokers want your DTI below 33%. That was a rule of thumb, not a lender limit, and it understates what conventional loans allow. The CFPB notes that different loan products and lenders set different DTI limits.[1] For conventional loans sold to Fannie Mae, the Selling Guide sets the ceilings.

Do not read 50% as a target. It is the ceiling a computer will accept, which is a very different number from the payment that lets you sleep. At a 50% DTI, half of what you earn before taxes is spoken for before you buy groceries. In Newport Beach or Laguna Beach, where HOA dues and property taxes put real weight on top of principal and interest, and in newer Irvine communities where buyers may also be carrying a Mello-Roos special tax in parts of Irvine, I push buyers to settle on their own comfortable payment first. The lender’s maximum is a fact about the loan. It is not advice about your life.

Track your spending before you pick your number

The easiest way to find your real number is to watch where your money goes for a couple of months. A budgeting app works, and so does a plain spreadsheet. Once you account for things like taxes and vacations you will have a good idea of where your money is going. Then replace your rent or your current mortgage with the payment you are considering, and see whether the month still works.

You know your own lifestyle. If you like to travel and dine out, protect room in your budget for it. A house that leaves no margin for the life you actually live is a house you end up resenting, and I have seen buyers sell within a few years for exactly that reason.

Don't Get Emotionally Invested Too Early

When you find the right house, it is hard not to start placing furniture in your head. I understand it. I have watched buyers assign bedrooms to their kids during the first showing.

The trouble is how much can still go wrong. Depending on the time of year and the market, there may be other offers on the property. Or the home inspection turns up something that changes the price, and the offer falls through. Neither is rare, and neither is your fault.

Go in the home buying process with high intention and low attachment. It will keep your spirits high when looking for that perfect place.

Paula Aragone

High intention means you move quickly and do your homework before you write. Low attachment means you are prepared to walk away when the numbers or the inspection tell you to. Holding both at once is harder than it sounds.

Why attachment costs money

Emotion shows up in the negotiation. A buyer who has decided this is the only house will drop a contingency they should have kept, or accept a repair credit that is too small, because losing the house feels worse than overpaying for it. Listing agents can usually tell, and in a multiple offer situation that attachment turns into an escalation you never planned for.

My advice is to decide your walk away number before you write the offer. Write it down. Tell your agent. If the price passes it, you stop, and you go see the next house on Saturday.

I will admit the exception, because it is real. Once in a while the house truly is scarce, a single story ocean view home in San Clemente for example, where another one like it may not come up for a long time. Paying a little more can be the right call there. Make that decision with your eyes open, though, not because you have already picked paint colors.

Don't Make Large Purchases Before You Close

The moment you start thinking seriously about buying a home, hold off on anything big. A new car is the classic example. A full furniture set or a new home entertainment center is a close second.

Your preapproval was based on how much money you had in your accounts and how much you owed when you applied. Spend a large piece of your savings and the cash you showed the lender is smaller. Pay for it with credit and your monthly debts are bigger. Either one can shrink what the bank is willing to lend you.

The car is the one I see most often. A buyer gets preapproved, the old car starts making a noise on the 405, and by Saturday there is a new payment of several hundred dollars a month. Run that through the DTI math from the last section. Every dollar of new monthly debt raises the ratio, and a buyer who was comfortably inside the lender’s limit may not be anymore.[1]

Paying cash does not get you off the hook either. Lenders verify the money you are bringing to closing,[4] and a large withdrawal for a sofa leaves less of it to verify.

As tempting as it is to picture the new car in the driveway of your new home, hold off until you close and you are sure you can afford both.

Don't Move Large Amounts of Cash In or Out of Your Accounts

Lenders read your bank statements line by line, and the deposits get questioned first. The reason is simple. An unexplained deposit could be a loan from someone, and a loan you have to pay back is a debt that belongs in your DTI.

Fannie Mae’s Selling Guide spells out what counts. A large deposit is a single deposit that exceeds 50% of the total monthly qualifying income for the loan.[4] If you plan to use money from a large deposit to close, the lender must document that the funds came from an acceptable source.[4] When the source cannot be fully documented, the unsourced portion is subtracted from your verified funds.[4]

Read that last part again. The money still sits in your account, but as far as the loan is concerned it does not exist.

Withdrawals deserve the same care. Pulling a large amount of cash out leaves your balance lower than what the lender saw at preapproval, and it invites a question about where it went.

How far back do lenders look at bank statements?

The original article said most lenders look at up to 60 days of statements. The Fannie Mae guide puts it this way: when bank statements are used, they typically cover the most recent two months, and the lender has to evaluate the large deposits in them.[4] So the two month figure holds as the typical case. Plan as though every sizeable deposit in that window will need a one line explanation with a document behind it, and get those documents organized before you apply.

Gift money for the down payment

A parent or family member helping with the down payment is common and perfectly fine, as long as it is documented the right way. On a conventional loan sold to Fannie Mae, the gift has to be evidenced by a signed gift letter.[5] That letter has to cover four things:

• The actual or maximum dollar amount of the gift
• The donor’s statement that no repayment is expected
• The donor’s name, address and telephone number
• The donor’s relationship to you[5]

The lender also has to verify that the donor had the money, either in the donor’s own account or already transferred into yours. Acceptable evidence includes a copy of the donor’s check alongside your deposit slip, or proof of an electronic transfer.[5]

Who gives matters. Relatives qualify, and so do some people with a familial relationship, such as a fiancé or a domestic partner. The donor cannot be affiliated with the builder, the developer, the real estate agent or any other interested party to the transaction.[5]

If you would actually have to pay the money back, it is not a gift. It is a loan, and the payment would be added to your monthly debt. Do not sign a gift letter for money you intend to repay.

Other one time deposits

Sold a car? A friend paid back money they owed you? You can use it, but you may have to prove it came from a legitimate source. Keep the bill of sale and the transfer record. If you know a sale or repayment is coming, ask your loan officer how they want it documented before you deposit it. Thirty seconds on the phone beats a week of letters of explanation.

If your down payment depends on selling the home you own now, that is its own timing problem, and I walk through it separately in my guide to buying in Orange County before you sell.

Don't Apply for New Credit

How much you can borrow comes down to two things: what you have saved and what you have coming in. Any extra debt pushes against that, and adding new credit during a purchase can change your loan amount more than buyers expect.

A new credit card with a balance adds a minimum payment to the debt side of your DTI.[1] So does the store card offered at checkout to save ten percent on a mattress. Even an account you never touch is a new line on your credit report that you may be asked to explain.

Shopping for the mortgage itself is a different matter. Comparing loan offers from more than one lender is a normal part of buying, and I encourage it. What I want buyers to avoid is new consumer credit stacked on top of the mortgage application.

My short version: no new accounts and no balance transfers from the day you apply until the day you close. If something truly cannot wait, call your loan officer first and ask what it will do to the file. Most of the problems in this article could have been prevented by that one phone call.

Don't Cosign a Loan for Anyone

This one sounds like common sense until a friend or family member asks. A sibling needs help with a car. A grown child is applying for a loan of their own. Saying no feels unkind, especially when your own finances look strong enough to buy a house.

Cosigning makes their debt yours. The FTC puts it bluntly: if the main borrower misses payments or stops paying, you must repay the loan, and you may have to pay up to the full amount of the debt plus late fees or collection costs.[7] The creditor can come to you without first trying to collect from the borrower.[7]

For a buyer in escrow, the bigger problem arrives before anyone misses a payment. The FTC notes that the creditor can report the loan to the credit bureaus as your debt, and that lenders will consider a loan you cosigned as your obligation.[7] That payment lands on the debt side of your DTI whether or not you ever pay a cent of it.

Then there is the credit report. If the main borrower pays late or defaults, that history can show up on yours.[7]

My position is firm on this one. Protect your own purchase first. If someone you love needs a cosigner, that person should not be someone who is in the middle of buying a home. Offer to revisit it after you close, when you can see exactly what you can afford to guarantee.

Don't Finance Anything for the New House Yet

New homes come with a shopping list. A refrigerator because the sellers are taking theirs. A washer and dryer. Bar stools for the island. Maybe the big screen TV that finally fits the wall.

Stores know this, which is why the zero interest offer appears at the register just as you mention you are buying a house. Accepting it while you are under contract is one of the ways I see buyers surprise their own lender. It is a new account with a new monthly payment, showing up at the exact moment the lender is adding up your debts for the last time.

Financing anything while you are applying for a mortgage or waiting to close does more harm than good.

The fix is boring. Make the list and wait. If the house truly needs a refrigerator on day one, ask for the seller’s to stay as part of your offer and put it in writing, or buy a modest one after the loan funds. Stay clear of the temptation to get every last thing for the new home and focus on your ability to afford the house in the first place. Everything else feels better bought later.

Don't Change Jobs or Start a Company Mid Purchase

Your ability to show you are financially stable is one of the biggest factors in getting a mortgage. Quitting or switching jobs makes you look like a bigger risk to the lender at the worst possible moment.

The timing is tighter than most buyers realize. For a salaried borrower, Fannie Mae requires the lender to verify employment no more than 10 business days on or before the note date.[6] In plain terms, someone may call your employer in the final days before you sign. If you resigned last Tuesday, the lender is going to find out.

For self-employed borrowers, the verbal verification has to be completed no more than 120 calendar days on or before the note date.[6] That longer window is no invitation to launch a business in the middle of escrow. A brand new company has no track record, and the income you were approved on came from the job you just walked away from.

What if the job change is a promotion?

It can still complicate things. A raise from the same employer is rarely the issue. A move to a new employer, or a switch from a salary to commission pay, changes how your income gets documented. Have that conversation with your loan officer before you accept the offer letter, not after.

If you are planning to apply for a new position or start your own company, the cleanest path is to do it once you have closed on the property. And of course, try not to get fired.

Don't Miss a Loan Payment

If you have loans you are paying off, make every payment on time from now until closing. You probably have not missed any if your credit is good, but be extra careful while you are applying for a mortgage.

When it happens, it is usually an honest mistake. You were away for work or traveling for a long stretch, or someone in the family was in the hospital and the bills slid for a month.

Your credit history is part of what the preapproval was built on, and a fresh late payment is exactly the kind of change that shows up when the lender takes its second look. It is also one of the easiest problems on this list to prevent.

Set it up so it cannot happen

• Turn on autopay for at least the minimum on every card and loan
• Put each due date in your phone calendar anyway, because autopay fails when a card expires
• If you will travel during escrow, pay whatever comes due while you are gone before you leave
• Check each account online once a week until you close

Dull. Effective.

Don't Switch Banks Before Closing

You probably do not switch banks very often. But banks run promotions, a cash bonus or a free gadget for opening a new account, and the timing can be tempting when you are about to move money around anyway.

Resist it. Your lender reviews your recent statements, typically the most recent two months, and evaluates the large deposits in them.[4] Move everything to a new bank in the middle of that and the transfer itself shows up at the new bank as a large deposit that has to be traced back to the old one. Now you need statements from both institutions and an explanation tying them together.

None of that is impossible. It is paperwork arriving in the weeks when you least want it, and it can make your life a lot more complicated than it needs to be.

Stick with the bank you applied with so you can show at least two months of transactions and balances in one place. Open the new account after you have the keys.

The same thinking applies to shuffling money between your own accounts. If the down payment has to move from a brokerage account into checking, ask your lender how they want it documented and move it once.

What Not to Do When Buying a Home: A Timeline From Preapproval to Keys

The ten mistakes above do not all matter at the same moment. Here is roughly how they line up, from your first conversation with a lender to the day the deed records.

1. Before you apply. Run your own DTI. Stop opening new accounts. Pull two months of statements for every account you plan to use and make sure you can explain each large deposit in them.[4]
2. At preapproval. Ask your loan officer what they verified and what they will check again before funding. If family is giving you money, get the gift letter and the paper trail done now.[5]
3. While you shop. Keep to the budget you set yourself, not the maximum the lender allows. Set your walk away number before each offer.
4. Once you are in escrow. No new debt, no cosigning, no bank changes and no large unexplained deposits.
5. The final two weeks. Expect your employer to get a verification call within 10 business days of the note date.[6] Keep every payment current and keep your job.
6. After the deed records. Now go buy the furniture.

The table below puts the whole list in one place, with the reason each move matters to the lender.

The list is longer than most buyers expect. Almost every item on it comes down to the same habit, though: before you do anything with money during a purchase, ask the lender first.

Get your finances and documents in order before the preapproval, get the preapproval before you start searching, and the hardest part of this list is already behind you. What remains is keeping still until closing, and that turns out to be the part buyers find hardest.