Congratulations! You’ve worked hard to save up to qualify to purchase a house. You’ve found a house you love and have managed to get your contract accepted in today’s competitive market. You’re just a week away from closing and getting the keys. Caution: DON’T BLOW IT NOW!
The loan you qualified for was based, in part, on your Debt to Income Ratio (DTI). The lender looks at all of your debt obligations as compared to your total income to determine if you are a good candidate to pay back the loan they are going to give you (typically and generally, lenders are comfortable with up to a 45% DTI.) If you’re about to close on a house, you’ve met this metric and the lender is going to provide you with the loan on closing day to help you buy your new place. But they do run that DTI again right before closing, and if it has changed significantly from when you qualified then that can impact your ability to close the deal. It could delay it, raise the interest rate you are anticipating, or – worst case – make you unable to close on the house at all.
One buyer we heard about recently was going to close on a great house in one week. In passing, he mentioned to his agent that he was pretty pumped up about the new car he just bought. “WAIT, WHAT?” the agent asked. “Please tell me that you chatted with your lender prior to buying it.” Well, he had not. Wheels revved into motion, the lender worked hard, fortunately the buyer had some money not tied to the purchase, and he was able to close on the house – but not after a week’s delay. This was a good outcome, the buyer could have been unable to qualify at all after the car purchase and would have had to void the sale of his new house.
It happens innocently enough and more often than you think. Buyers are under contract and excited about moving into their new place, so the week before closing they go out and buy those new kitchen appliances they want, or that amazing (expensive) couch they’ve had their eye on. Then, BOOM!, their DTI percentage changes and things can go awry.
Whether you’re planning on buying a home in the next year, or are under contract on one now, it is IMPERATIVE that you discuss with your lender anything that will impact your DTI. Cars, furniture, big vacations – anything that will add to your debt should be discussed prior to purchase or take off. Conversely, it’s also important to talk to your lender before paying something off, like a credit card or a car loan. Sometimes keeping cash on hand will garner you better mortgage terms than paying off a loan. Your mortgage broker can direct you toward the best way forward to keep you qualified and set yourself up for the best interest rate possible.
In the most recent episode of Properties and Pints filmed at Crafthouse in Reston Town Center we discuss DTI and how to protect it. My co-host, Scott Petersen puts it this way:, “don’t put the car before the house!” Or at least, not until you talk to your lender about it first.
