by Megan Wild
If you’re having a home built for you, you might have a perfectly understandable desire to purchase some big-ticket items. A sofa and armchairs for your new living room. A state-of-the-art convection oven for the kitchen you’ll have in a few weeks. It happens all the time — or at least the desire arises in every new homeowner.
But it’s crucial to avoid big purchases during the building of a home. Here’s why.
1. Your Ability to Obtain a Mortgage May Be Affected
If you haven’t yet obtained a mortgage, making big purchases may affect your ability to get one. Mortgage lenders look at many factors, and one of them is your credit history and your credit score. If you purchase large items on a credit card, it may negatively affect your credit. It may also increase your debt-to-income ratio or the total debt outstanding, which are just two of the categories making up a credit score. As beautiful as that new sofa may be, you don’t want a lender to pull your credit and turn you down.
Mortgage lenders also look at your cash available. They want to see a robust amount available for closing fees, escrow fees and points. So even if you pay cash for your large purchases, a lender may view it negatively if it impacts your cash position. You can be turned down for not having enough cash, too.
2. Your Mortgage Terms May Be Affected
The terms of your mortgage matter a great deal. The lower the interest rate, the less you will pay in monthly payments. Points may be required, and they can lower the total amount you’ll pay. The size of the down payment matters as well. The more you have, the less your mortgage will be.
Many lenders will offer the best interest rates to people with good credit history and a sizable down payment. Twenty percent is standard. Paying points is another way that one can lower the interest rates. Each point is usually worth $1,000.
If you don’t have the cash for a 20 percent down payment or to pay points, your interest rate can be higher. You may not have that cash if you’ve splurged on large purchases. If large purchases have caused your credit to be affected, that can affect your interest rates and the points the bank wants to charge as well.
3. Your Financial Information May Be Monitored Up Until the Closing
If you’ve already obtained pre-approval on a mortgage for your new home, you may think that beginning to make large purchases is smooth sailing. After all, your lender has already looked at all the financial information you have to supply to be approved for a mortgage. This information includes your credit, income, expenses, job history and more. The lender approved all that. What could go wrong, right?
Well, new home buyers should know that lenders monitor credit right up until the closing. They don’t stop until they have the signed paperwork in hand. From their perspective, they want to make sure nothing has changed that could impact a home buyer’s ability to pay the mortgage. They don’t like to see any changes. Even a job change that brings in more money can raise a red flag to a lender because they want to see a stable job history.
If you place large purchases on a credit card or deplete your cash to buy big-ticket items, a lender will know it. They will rerun your financial information. Make no mistake about it. People have had pre-approval pulled if the lender decides they are not a good risk after all. Some lenders will see purchases themselves as a red flag even if you still have cash and a good credit score. It signals impulse buying to them — something bankers don’t like.
4. You Need Cushions of Money and Time
Savvy homebuyers need cushions for many elements of purchasing a home. They should have a cash cushion for home maintenance and repair, for example. What if a storm occurs your first night in the new home and sends a tree branch through your window? That’s unfortunate, but it’s prudent to have cash for eventualities like this. It’s part of responsible homeownership.
Similarly, builders sometimes encounter roadblocks that make the date for completion of the home a bit later than they originally forecast. Cold or rainy weather or unanticipated supplier delays can happen. If you were told you could move in on February 1st, it’s ideal to have a backup plan if that date has to be changed.
If you’ve already bought large items, the cash cushion may not be there. And you know what? Large items need to be delivered. If you need to stay in your current home for a while before the new one is completely ready, you don’t want a new washer and dryer or sofa for which you have no space. Plus, you’ll have to pay to move the big-ticket items again when you do move. It’s better just to wait.
It’s exciting to think of all the large purchases you can get for your new home, but it’s not a good move to buy them before you move in. Doing so can affect obtaining a mortgage, the lender’s terms and your ability to have sufficient cash reserves.