There’s no denying the homebuying process is exciting. Sure, it can be stressful, and it might make you anxious at times, but the thought of starting over with a clean slate in a new location is enough to make anyone thrilled for their future. Imagining all the new furniture that will fill the home and put a smile on the face of every family member.
Maybe it’s a movie-theater-style reclining leather couch or a smart refrigerator with a touchscreen exterior that’s caught your eye. Either way, that’s a fun, and big, transaction. One that could be too big if your loan hasn’t closed yet.
Just like buying anything on credit before your loan hits the closing table, it’s harmful to your loan if you finance new furniture before completing the final step in the mortgage process. In fact, there are a few different reasons why financing furniture early is detrimental to your loan.
It Changes Your Credit
Occasionally, credit scores are reverified by the underwriter. If the credit report on file expires prior to closing, your lender will need to pull a new report. So, if the underwriter sees a new debt or change in your credit that wasn’t there before, they may hold your loan for further review and conditioning.
Throughout the loan process, Mortgage Bankers are notified when new credit accounts are opened. Once they know about them, they must get the details of the debt and add it to your current liabilities on the application. This could cause problems with the debt-to-income ratio and, potentially, means you’ll no longer qualify.
At Atlantic Bay, we perform what’s known as Upfront Underwriting. That means you’ll get conditional approval for the exact dollar amount you qualify for prior to making an offer on a home. Any alterations to your credit could invalidate that number.
Fresh Debt Damages Your Credit Score
As you might expect, new debts drop your credit score. So, if you paid for a new couch with your credit card, and you haven’t paid it off by the time your lender rechecks your credit score, you could see some negative effects on your loan package.
If your score has been lowered, it could affect the loan by raising its rate. If the score dropped below your lender’s minimum requirement, it could cause the loan to be denied.
Most loan types have a credit minimum, so if the new furniture debt drops your score, you run the risk of losing your current loan. That means you’ll have to restart the process from the beginning. The most common loan minimums vary by lender.
For example, if your credit score drops below 640 after buying furniture, you’ll no longer meet the requirements of your USDA loan.
Paying Cash Is Not the Solution
Even if you pay for furniture before closing with cash, your loan could still be in danger. Don’t forget about the savings you need for your down payment and closing costs! VA and USDA loans are 100% financed, but other loan types require you to pay a percentage of the down payment upfront (typically 3% to 3.5% depending on your loan). And closing costs, or settlement costs, for any loan are the charges from your lender for the services they provided. Read our article on the two upfront costs you may see.
Leave Your Credit Be...For the Time Being
Simply put, before your loan closes, don’t do anything that will alter your credit score or overall financial situation. That means, don’t take out any new loans, don’t miss any bill due dates, and don’t finance anything before all documents are finalized. Your loan’s approval is, in part, built off your credit the moment you apply, so don’t risk your loan being halted or denied over financing something you could wait a few weeks to purchase.