Major Purchases
Now that you have the ability to purchase a home, you also have the ability to make many of the major purchases that you have been dreaming about as a kid. Whether you were fantasizing about living in a condominium that you owned while driving a BNW equipped with the best car stereo or your dreams were of living in a luxurious house full of antique furniture juxtaposed with the most technologically advanced appliances, you have finally reached a point in your life where you are able to have it all.
Except, for most people this really isn't the case. When you make plans to buy a home, one of the worst things that you can do is to make major purchases. Unless you're exceedingly wealthy and are able to buy a home without the assistance of a lender with one single payment, you will have to depend on a lender and pay monthly mortgage payments.
Mortgage payments are not a sign that you are financially insecure but are rather a fact of life for most homeowners. To be perfectly honest, homes are expensive and generally require years to pay off. Considering the various roles that a home plays for its homeowner (place to sleep, social setting, investment property), a home should be expensive. Therefore, once you decide to buy a home, you should expect to make some sacrifices in order to pay for the home.
Whether you want to buy an automobile, furniture, appliances, electronic equipment, or jewelry, you should understand how these purchases might negatively affect your credit rating. Additionally, if you want to pay for expensive experiences such as a vacation or for a wedding, you should also realize the ramifications of these costs on your dream of buying a home.
Example
Take the case of Shannon, a lawyer in her early 30's. Shannon was a successful attorney who was working for one of the major law firms in Texas. Shannon seemed to have it all: she had a great job, a supportive family, a boyfriend who was her high school sweetheart, and a salary that allowed her to pay for practically anything that she wanted. One such thing was a country home that she had been dreaming about since her childhood. After months of looking for a country home, Shannon was able to identify the home of her dreams. A luxurious ranch, this home had the added advantage of being in the same area as where she had grown up.
At around this same time, Shannon received another piece of great news. Her boyfriend had proposed to her and she, of course, said yes. Things were shaping up great for Shannon and she soon delayed the purchase of the ranch in order to plan her wedding. The home seller happily agreed to this delay and Shannon soon dove right into wedding preparations. Shannon and her boyfriend agreed that they needed to put on an extravagant wedding for their families and friends to enjoy. No expenses were spared and their wedding was a fantastic experience for everybody involved.
After they came back from a weeklong honeymoon, Shannon resumed her dream to purchase that country home she had her eye on for months. The home seller had delayed selling the home waiting for Shannon to return from her wedding and Shannon soon entered discussions with the home seller about buying the country home. Shannon was in bliss, after all, what better way to celebrate the beginning of a marriage than with moving into a fantastic home that could conceivably move between generations of her new family.
Shannon soon contacted a loan offer in order to pre-qualify for a mortgage loan. Thinking that her financial matters would not be a problem due to her high paying job, Shannon quickly dismissed any worries of her inability to pre-qualify for a loan from her mind. Filling out the forms, stating her income, and supplying pay stubs as well as W2 forms, Shannon was at work thinking that all of these middling details were going to be worked out. However, she received a phone call from the loan officer who had methodically and thoroughly crunched all of the numbers and receives the news that due to the expenses incurred by her wedding that she did not pre-qualify for a mortgage loan.
The Message Is Clear
Now before you curse the mortgage loan officer and start feeling too bad for Shannon, you should know that everything turned out fine. After she and her husband paid off the bills acquired through the wedding, Shannon went through the loan pre-qualification process again and things turned out better. Although the country home she first identified had been sold, Shannon and her husband were able to find a similar home after a couple of months. However, things could have turned out so much better for Shannon if she had followed the rule of not to make major purchases before buying a home.
The reason why you should not make any major purchases before buying a home is clear: major purchases will affect your credit in a negative way. Even if you have had your credit history checked and analyzed to find out you are in the best possible position, it is still not a good idea to make a major purchase until the keys are in your hand. In many ways, the biggest obstacle in acquiring a home is in the process of acquiring financing. In order to make the substantial investment required to purchase a home, you must make financial sacrifices in order to acquire a loan.
Making large purchases will jeopardize your ability to attain a mortgage loan. This is because loan sources during the process in which they determine the ability of prospective clients to qualify for a mortgage look at the statistic debt-to-income ratio. What debt-to-income ratio measures is the percentage of a person's gross monthly income is used to pay off debts. How this effects your mortgage qualifications is that the loan source will take this ratio and measure your ability to make the monthly housing costs that come with owning a home such as: principal, interest, taxes, insurances, and homeowner's association fees. Additionally, outside debt such as monthly consumer debt, credit cards, student loans, and installment debt are also factored into the debt-to-income ratio.
As an important source of measuring your qualification to receive a mortgage loan, it is in your best interest not to increase your debt-to-income ratio by making any major purchases. Most major purchases have monthly payments attached to them and therefore your debt loan will increase. This will cause concern in your loan source about your ability to make your monthly mortgage payments, as the amount of monthly income you have available to make these payments will decrease.
Additionally, making major purchases can reduce the amount of money you have available to purchase a home. For example, if you were to purchase a car, the monthly payments attached to this car will decrease the amount of income you have available to make monthly mortgage payments. Taking into account interest rates offered on loans, it should be noted that you will qualify for a loan that is significantly less than what you could have qualified for if you hadn't made a major purchase.
Example 2
This is what happened to Kuhan, a Computer Engineering graduate who was looking to move out of his parent's house and to a loft in trendy Seattle. After acquiring a great job at a ginormous computer company, Kuhan decided to celebrate by buying the car of his dreams, a BMW. Although Kuhan was able to buy a BMW and also pre-qualify for a mortgage loan, he noticed the difference between the loan that he received and the loan that he could have received if he did not purchase a car. With a monthly car payment of $400 a month and a salary of $5000 per month, Kuhan found himself on a thirty-year fixed rate loan with an 8% interest. After doing the math, Kuhan soon realized that he would have qualified for $55,000 less if he did not have the car payments to worry about.
Even if you do have the financial ability to make a major purchase while making monthly mortgage payments on a home, you have to realize that it isn't you who is making the decision about whether you qualify for a loan. Your loan source will have a much stricter guideline to what qualifies prospective clients for a loan and will probably not pay any attention to any financial schemes that you have concocted to make buying a home and another major purchase possible.
For individuals who want to make a major purchase but want to subvert the mortgage qualification process, using cash to make major purchases may seem like an attractive proposition. However, it should be noted that cash reserves are a factor that is considered by loan sources when approving mortgage loans.
If you are firmly committed to making a major purchase before you finalize the deal to buy a home, you should understand that making a major purpose does not necessarily mean you cannot buy a home. In some cases, it will cause difficulty in obtaining pre-approval for a mortgage but for the most part, all making a major purchase before buying a home does is add a complication to this already complicated process. Before you make a major purchase just think about whether this major purchase will have the same impact on your life as owning a home would. For the most part, the answer will always be no.
