This article is about Furnishing Your New Home Purchase Prior To Closing On Home Loan
Furnishing Your New Home Purchase:
Furnishing your new home purchase is exciting:
- It is probably the most memorable time for homeowners
- Most homebuyers cannot wait in going out shopping for new furniture once they have an executed real estate purchase contract
- Homebuyers furnishing your new home purchase should wait until they have closed on their home
- There are many things to consider when furnishing your new home purchase
- Purchasing your new furniture, especially using funds from your bank account or buying new furnishings with credit can be like playing with fire
- Many furniture companies will offer special deals if consumers apply for their furniture credit cards
- Many furniture credit cards will offer zero interest for one year or no payment until a later date where most home buyers cannot refuse
- However, buying new furniture can have a devastating outcome when it comes to the mortgage application process
Furnishing Your New Home Purchase Using Delayed Financing
Nothing is wrong with shopping for new furniture after having an executed real estate purchase contract and most folks do.
- One of the most temptations they will encounter when shopping for furniture is that many furniture stores will have delayed financing
- Delayed financing on furniture credit cards is where consumers can buy furniture now and will have delayed financing where they will not have first payment until a year later
- Other times, furniture stores will offer 0% financing for the first year
- Furniture stores try to sell consumers on temptations
- They may advertise that the blow out sale for this weekend only or end of the month sale or special date
- The sale or special financing is good until for until a certain time period
- Do not get suckered in with this common sales gimmick
- This is because it may end up hurting rather than helping
- I had cases where due to the furniture purchase that the mortgage loan file blew up on higher debt to income ratio
Or because the borrower has used the sourced cash in their bank statements to purchase furniture.
Dangers With Opening New Credit During Mortgage Process
Lenders will not just pull credit once during the mortgage loan process.
- They will do one or more soft credit pulls and if they notice credit inquiries, the mortgage loan underwriter will want to know
- A letter of explanation will be required for every credit inquiry
- Plus, every time consumers apply for new credit, the creditor will run a hard credit inquiry
- Each hard credit inquiry will drop your credit scores by 2 to 5 points and sometimes more
- Whenever consumers incur new credit during the mortgage process, the new debt will be questioned
- The minimum monthly payments will be calculated and used in debt to income ratios calculations
If borrowers already have a higher debt to income ratios and incur more debt, especially by buying new furniture, it could affect the maximum debt to income ratios allowed and mortgage loans can get denied.
Furnishing Your New Home Purchase: Buying Furniture With Cash
Buying new furniture during the mortgage loan process with cash can also present a problem.
- Lenders require 60 days of bank statements and will analyze the bank statements
- The purpose of this is to make sure borrowers have sufficient funds for the home purchase
- All funds in the bank statements need to be sourced
- Any irregular and/or large deposits will be questioned
- If a home buyer is purchasing a $100,000 home with an FHA Loan and getting a $5,000 sellers concession where it will cover all of the closing costs, borrowers do not need any closing costs
- Borrowers would need the 3.5% down payment required on the FHA Loan home purchase or $3,500
- If borrowers provided bank statements initially to the mortgage processor and the underwriter confirmed and sourced all of the cash in the bank account and issued the conditional mortgage loan approval, the borrower is not out of the woods quite yet
Mortgage underwriters will verify that the $3,500 down payment is still in the bank account prior to the underwriter issuing a clear to close.
Property Tax Prorations
In the state of Illinois, property taxes are paid in arrears:
- Home sellers need to give the home buyer one year’s property tax prorations
- Property tax prorations can be used towards the home buyer’s down payment
- So on the above example, borrowers will not need the full 3.5% down payment or $3,500
- The net amount of the down payment will be the $3,500 less the property tax proration credit by the home seller
- However, lenders still need to see that the full down payment of the 3.5% of the home purchase price or $3,500 needs to be seasoned in the borrower’s bank account
Many homeowners want to purchase furniture and use the funds they have in their bank account. Unfortunately, this will not work. This is because, as mentioned earlier, lenders will want to see updated bank statements until the day of the closing. If there are not enough funds to show the full down payment without the property tax prorations, lenders will not fund the mortgage loan. The home buyer will not close. Bottom line is that the home buyer should wait in furnishing their home and avoid buying furniture unless they have plenty of assets.
June 4, 2020 - 4 min read