Why You Shouldn’t Make Big Purchases Before Closing on Your Home: A Crucial Warning for California Homebuyers

Buying a home is one of the biggest financial decisions you’ll ever make, and careful planning is essential, especially when it comes to your finances. If you’re in the process of securing a mortgage, there’s one crucial rule you must follow: don’t make any big purchases until after you close on your home. Whether it’s a new car, furniture, or any other major expense, making big purchases before closing can jeopardize your ability to secure your mortgage and close on your dream home.

Here’s why it’s so important to wait:

• Impact on Your Debt-to-Income (DTI) Ratio

Mortgage lenders carefully analyze your debt-to-income (DTI) ratio, which compares your total monthly debt payments to your gross monthly income. This ratio helps them determine whether you can afford to take on a mortgage.

When you make a big purchase and finance it through a loan or credit card, you increase your monthly debt obligations. This increase can push your DTI ratio above the lender’s allowable limit, potentially leading to a reduction in your loan amount—or even outright denial.

• A Drop in Your Credit Score

Applying for credit to make a large purchase, such as a car loan or store credit card, results in a hard inquiry on your credit report. Too many hard inquiries in a short period of time can lower your credit score. Additionally, if you open new accounts or carry large balances, your credit utilization ratio (how much credit you use compared to your limits) rises, further hurting your score.

A lower credit score can significantly affect your mortgage. It might lead to higher interest rates or even cause lenders to revoke your pre-approval. In the worst-case scenario, your mortgage application could be denied altogether.

• Escrow and Closing Process in California

In California, the closing process typically involves the use of an escrow service. During escrow, the buyer’s funds are held by a third party while final checks and paperwork are completed. One critical aspect of this process is that lenders may recheck your credit right before closing, a step referred to as "funding the loan." This final check ensures that your financial situation has remained stable throughout the escrow period.

If you make a significant purchase before or during escrow, it can complicate or delay the process. The lender may reassess your loan eligibility due to changes in your debt or credit score, potentially delaying the closing or causing the lender to withdraw approval. This could cost you the home or significantly prolong the buying process, especially in California's competitive real estate market.

• Increased Financial Stress

Taking on additional debt before buying a home doesn’t just affect your mortgage approval—it can also strain your finances. Buying a house comes with numerous additional costs, including closing fees, moving expenses, property taxes, and potential repairs or renovations. Taking on a new car payment or furniture loan on top of these existing commitments can stretch your finances thin and increase your stress level.

• Focus on Stability

Lenders want to see that you are financially stable when applying for a mortgage. Making large, unnecessary purchases during the mortgage process suggests the opposite. It may raise red flags for lenders, as it can indicate impulsivity and poor financial management. This instability could lead to the lender reevaluating or even denying your mortgage application.

What Should You Do Instead?

If you’re excited about furnishing your new home or upgrading your car, be patient and wait until after your mortgage is finalized and the home is officially yours. After closing, you’ll have a clearer picture of your financial standing and can make big purchases without jeopardizing your loan.

If you have any questions don’t hesitate to REACH OUT.

Best regards,

Lindsay Woolf | CA DRE #02236711
DOMO Real Estate | CA DRE #01290500

Disclaimer: The information provided in this blog post is for general informational purposes only and does not constitute legal advice. Real estate transactions can be complex and subject to local regulations.