Buying a home is exciting-you're not only investing in your future, but you have a whole new house to make your own. This means choosing paint colors, light fixtures, finishes, and furniture; not to mention the landscaping. It's so tempting to get a head start on all the new things you need to buy, but you should know that excessive spending while you're in the contract-to-close period can cause problems with your final loan approval.
Here at First Savings Mortgage, we would actually caution you against changing any of your spending habits, unless you're making an effort to spend less while you're waiting for your mortgage loan to close.
How Loan Approvals Work
When you apply for a mortgage loan, you give the lender a detailed and comprehensive picture of your financial situation. The expectation is that your spending habits and your debt will not change between the time your loan is pre-approved and when your loan is cleared to close. Your loan officer has a checklist of conditions that need to be cleared before your loan gets a final approval, and one of those conditions is to pull an updated credit report, ensuring that your scores and debt load have not changed since your initial approval.
How Your Purchases Can Affect Your Credit Score
When you use credit to buy things, your credit score changes-and not always for the better. If you open new accounts to buy things for the house, you're probably maxing out those new cards, which can lower your score. If you've maintained low balances on credit cards but start using those cards to buy stuff before you close, that can cause your score to drop-you're using too much of your available credit.
So, there are two things at play here that can make your loan go sideways: your credit usage increases, which lowers your score, and you have too many recently opened accounts, which can also cause that critical number to drop.
How Changes to Your Credit Report Can Impact Your Loan Approval
A lower score is not the end of the world if you already had a really strong credit score and a low debt ratio. However, if any of your numbers were tight to begin with, a spending spree can put your loan in real jeopardy. Your loan officer tallies up any new debt you've incurred since your original mortgage approval, and if your debt ratio is too high-what you owe monthly relative to your income-that can put a serious wrench in your final approval.
What happens next is typically that you will have to make a bigger down payment, and things can really go downhill from there. If you don't have the cash to put more down, then you could lose the contract on the house-not uncommon in the current real estate market. Your interest rate will almost certainly be higher; rates are almost a full point higher in spring 2022 than they were at the beginning of the year, so you may not be able to afford the same house if both your rate and payment go up too much.
Listen to Your Loan Officer!
Your loan officer at First Savings Mortgage reviews the process with you when you're first approved, and explains that we will revisit your credit report and debt ratio before the final approval. They're not kidding-while loans don't often blow up at the last minute because the buyer has been on a spending spree, it can happen. It's just not worth it to risk your new house.
Even after you close, spend wisely and cautiously - you have plenty of time to finish your landscaping and buy furniture. Enjoy your new home, and don't rush into overspending.