Good news! You have just been pre-approved and your future dream is under contract, but that doesn’t mean you can sit back and assume the home is yours. While most of the hard work is done, there are still some things you need to avoid in order to refrain from delays in your journey to home ownership.
1. Don’t Purchase a New Vehicle
If you would like to live in a new car instead of your dream home, then go ahead! This is the #1 reason buyers get declined for financing or approved for a much smaller mortgage than they want. Car payments are financial deal killers, as far as mortgages go.
2. Don’t Purchase a New Vehicle!
Did I mention don’t buy a new vehicle? Seriously just don’t. The short of it is this: that $650-750 payment very well might throw off your Total Debt Service/Gross Debt Service ratios (basically – your debt to income level). These are the metrics that banks use to qualify you for a mortgage. That new car might have seemed like a good idea at the time, but it could hurt you financially for years to come.
The long story: A vehicle is a deprecating asset. This means that as time goes on, the value declines. Financing a depreciating asset, tends to be a bad idea, especially if you have a higher interest rate on your loan. You’re paying the same monthly payment for an asset that is worth less as each month passes. Here is a quick visual example of how this could affect your real estate purchase and net worth. Please keep in mind this is a very simplified example and meant to show how purchasing real estate is a great builder of wealth.
New car price: $40,000. Financed over 6 years (72 months) at an interest rate of 4.5%
Approximate payment would be $715/month
At the end of 6 years, your car might be worth 1/2 the value ( if you’re lucky), call it $20,000
Now, your car is worth $20,000 less than purchase price, which cost you $227/month in depreciation ($20,000 / 72 months) for a total monthly cost of $992 ($715 + $227)
BUT WAIT, THERE’S MORE!
Let’s assume you already have a car payment of $300. By increasing your payment to $715, that just reduced your mortgage affordability by about $55,000! If you didn’t have a car payment, buying that new car reduced your home purchasing power by about $75,000. If you were approved for $400,000, now you only have $325,000 to work with.
Using the same 6 year term as the car purchase, and a yearly home price increase of 4.5%:
At the end of 6 years, the home you bought for $325,000 (because you wanted that shiny new car) might be worth $425,000. BUT if you didn’t buy the new car and kept fixing the old car, the home you bought for $400,000, might be worth $520,000.
The difference is big. Your $325,000 home increased by $100,000 over 6 years, but the car depreciated by $20,000 (Again, simplified example) So, let’s say this decision increased your net worth by $80,000 over 6 years.
>>>Your $400,000 home increased by $120,000 and you didn’t have depreciation associated with the car. So your net worth increased by $120,000 over those 6 years..a difference of $40,000 over 6 years, just because you needed a new car.
>>>If you invested the difference of $555 monthly ($40,000 / 72 months) and received a return of 7%, you would have earned an extra $10,000 in interest, bringing the potential difference to almost $50,000!
So, if you decided to buy the new car and the $325,000 house, your decision has now cost you $715 directly (the car payment) PLUS $695 ($50,000 / 72 months) in lost opportunity cost PLUS the $227 in vehicle depreciation for a grand total of $1,637.
Is the car still worth it?
3. Don’t Apply for a New Credit Card
Remember that when you apply for a new credit card, it can poorly affect your credit rating. Be cautious and wait it out until after closing!
4. Don’t Go Furnish the Home Before you Own It
I know how exciting it can be for this step of your life, but nothing should be rushed. You may already have picked out the new couch, entertainment center and big screen TV, but hold on until after you close on the home.
5. Avoid Changing Jobs
Although job changes can provide better pay and a chance for advancement, it could delay your quest for home ownership since lenders typically want to see a certain amount of time incurred as an employee, as well as assurance you are not on probation. It’s best to discuss with your lender/underwriter if this happens to you.
6. Don’t Get Behind on Payments
This is a no brainer. Pay your bills. Make sure you stay on top of your credit card and current monthly bills to maintain good standing.
7. Don’t Close Any Credit Accounts
It makes sense to clean up your finances by canceling unused credit cards and transferring balances to other cards in order to get a lower interest rate when you’re offered them. However, don’t do it! This can be a bad move for your overall credit score. A factor of your credit score is how long you have had your accounts open.
8. Don’t Spend Your Savings
This may seem like an obvious one, but it’s important to remember you’re going to need cash for a down payment, closing costs, renovations etc.
9. Don’t Move Money Without a Paper Trail
Sometimes, your lender will ask for 3-6 months of bank statements to ensure there are no suspicious transactions and to confirm that you have regular income.
Remember if you have any questions about the “do’s & dont’s” while in the process of purchasing a home, contact Alex Grinton, Brantford Real Estate Agent at 519-761-2417. He would be more than happy to help make your dream of home ownership come true!