Dos and Don’ts Between Contract and Closing
Many homebuyers focus all their effort on finding their dream home and getting under contract, figuring that the rest of the process is likely to take care of itself. Not so. The best lender in the world won’t be able to close a deal under certain circumstances.
Here are some deal-killers to avoid at all costs:
- Don’t get married or divorced between contract and close on a home. A great deal of work must be done to move a homebuyer from “pre-approval” (a very preliminary step) through processing, underwriting, and final loan approval. Changing your marital status at any point in that process is likely to push closing by days or weeks, at best, while the lender recalculates your new household debt-to-income ratio and reviews additional required documents. At worst, it may cause you to lose your credit approval. That said, a little bit of planning (and, in the case of divorce, consultation with your lawyer) can avoid this issue entirely.
- Don’t co-sign for anything with anyone. Co-signing is the same as taking a loan out all by yourself for credit purposes; it will count as debt in your debt-to-income ratio until it is paid off. So if a home purchase is in your future, think long and hard about co-signing for anything, and definitely don’t do it between acquiring your pre-approval letter and final closing on your purchase.
- Don’t pay any bills late, and don’t overdraw your bank account. Any late payments or overdrafts will adversely affect your credit score, which may mean that you no longer qualify for the rate you were quoted during the mortgage pre-approval. A higher rate in turn affects the maximum loan you can qualify for, so one late payment between contract and close really can sink a deal.
- Don’t deposit large sums of unsourced cash into your bank accounts. Any non-regular deposits must be “sourced” by the lender — they will need a copy of the check, a bank account statement showing a withdrawal, a gift letter, or another document showing where the funds came from. In other words, if you’re in the habit of keeping cash under your mattress and you don’t have documents to show where that cash came from, it’s best to keep it there until your home purchase has closed and funded.
- DO NOT MAKE LARGE PURCHASES OR OPEN NEW ACCOUNTS. Don’t buy a new car; don’t buy the perfect new sofa for your new living room. Don’t open a new credit card, and most importantly, DO NOT MAKE ANY PURCHASE USING HIGH-INTEREST STORE CREDIT, particularly if the store credit comes with a balloon payment. You can buy whatever it is after your home purchase has closed and funded. Otherwise, you may wind up owning the sofa and not the house.
- Don’t change your job. If at all possible, it’s best to stick with the same employer from pre-approval to closing. If you must change jobs, this is not the time to switch to a 100% commission or self-employed career.
And here are some best practices for the important time period between contract and closing:
- Pay all your bills on time. You’ll be busy submitting documents to the lender at what feels like every turn, and it can be easy to forget mundane financial tasks. Be extra careful to keep all the normal bills paid as usual.
- File your taxes. File your taxes on time, and avoid filing an extension unless absolutely necessary. Your lender will need timely tax returns to issue final approval and clear you to close.
- Give the lender everything they ask for, as soon as they ask for it. At a minimum, you will be expected to provide your employment and residence history for the last two years, W-2 forms, pay stubs, current statements for all retirement and investment accounts, bank statements for all accounts for the last two months, complete copies of tax returns (including all schedules) for the last two years, copies of driver’s licenses and/or social security cards, and, as applicable, copies of any divorce decrees or recent diplomas. Please note: the “last two months” benchmark moves with time, so expect to provide additional statements as they come in.
It’s best for homebuyers who intend to finance their purchase to be psychologically prepared for the intrusiveness of the mortgage approval process. For higher net worth individuals choosing to finance rather than pay cash, it’s especially important to consider that the greater the assets and the more complex the estate, the more burdensome the document requests can be.
Feel overwhelmed? Don’t worry! With the right professionals on your team and realistic expectations for the document-gathering process, any buyer can cruise to a stress-free closing.