8 Mistakes to Avoid When Buying a Home
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Buying a home is one of the most significant financial decisions many Canadians will ever make. Whether you’re a first-time buyer, refinancing, or moving into a new home, avoiding common mistakes can mean the difference between a smooth approval and a last-minute mortgage disruption.
With stricter mortgage rules and lenders rechecking credit just before funding, even a minor misstep, such as applying for a credit card or changing jobs, can jeopardize your approval. Here are eight crucial mistakes to avoid when buying a home, so you don’t accidentally derail your mortgage approval.
Key Takeaways
- Lenders may recheck your credit or employment before funding.
- Avoid making changes to your debt levels and refrain from major purchases before closing.
- Keep your down payment funds traceable and avoid undocumented transfers to prevent any issues.
Why Timing and Caution Matter During the Homebuying Process
Many homebuyers assume that once a mortgage is approved, the financing is locked in, but that isn’t always the case. Lenders reserve the right to re-evaluate your financial position before the deal officially closes. This is particularly common when the time between approval and funding spans several weeks or months. Closer to your closing date, lenders may pull a fresh credit report, reverify your employment, or request updated bank statements.
Even a seemingly minor change in your financial situation can alter your debt service ratios or raise red flags that weren’t present during pre-approval. These changes may delay your closing, result in a reduced loan amount or a complete withdrawal of the mortgage offer. Being cautious with your financial behaviour during this period is critical to ensuring your approval stays intact and your home purchase proceeds smoothly.
Avoid These 8 Mistakes When Buying a Home
Once your mortgage is approved, it’s easy to assume that nothing can get in the way of your home purchase. But that’s not always true. Certain financial decisions made between mortgage approval and closing can have serious consequences.
To protect your deal, it’s important to know what not to do before the funds are disbursed. Below are eight of the most common (and costly) mistakes to avoid.
1. Racking Up Credit Card Balances
Maxing out your credit cards or even significantly increasing your balances can impact your credit utilization ratio. This ratio reflects how much of your available credit you are using, and it’s one of the most important factors in your credit score. If you are using more than 30% of your credit limit, your credit score could drop, even if you make timely payments. Lenders often interpret high utilization as a sign of financial stress, which can affect your borrowing capacity.
During the final stages of mortgage approval, any sudden increase in your credit card balances could reduce the amount you qualify for or cause your lender to question your financial stability. To keep it safe, keep your spending modest, keep your balances below 30% of each credit limit and pay off any large balances before your lender rechecks your credit, which typically occurs before closing.
2. Applying for New Credit
Applying for new credit may seem harmless, but doing so before your mortgage is funded can raise questions with your lender. When you open a new credit account, it’s reported to your credit bureau. Even if the new credit hasn’t been used or doesn’t have a balance, it will be assessed and taken into account as a potential liability and alter your debt service ratios.
Lenders may view applying for new credit as a sign that you are overextending yourself financially. To avoid complications, it’s best to pause all new credit applications until after your mortgage has funded and your home purchase is finalized.
3. Changing Jobs or Employment Status
Changing jobs or your employment status, even if it comes with a raise, can create uncertainty for your lender. Income stability is a critical requirement in the mortgage approval process, and many mortgage lenders are hesitant to finalize a mortgage if you’re in the middle of a career transition.
Lenders typically want to see at least 2 years of stable, consistent employment, so any shift in your income and employment status can trigger a re-evaluation of your application. This can delay or derail your funding. It’s usually best to delay any changes in employment until after your mortgage has funded, even if it comes with a significant pay increase.
4. Buying or Leasing a Car
Purchasing or leasing a car before your mortgage closes can seriously impact your borrowing capacity. Auto loans come with fixed monthly payments, and lenders include those debt obligations when calculating your total debt service (TDS) ratio. Even if you can afford to make car and mortgage payments, the added debt could push your ratio above the allowable threshold, causing your mortgage approval to be scaled back or revoked.
5. Making Big Purchases with Deferred Payment Plans
Retailers often advertise “buy now, pay later” deals on big-ticket items, such as appliances, furniture or electronics, which is especially enticing for new homeowners who need to furnish an entire home. Lenders view these types of plans as credit obligations even if you haven’t made a single payment.
These types of financing increase your debt load on paper, which can push your debt service ratios above lender limits and trigger a re-evaluation of your mortgage approval. Even though you may not owe anything upfront or for several months, deferred payments are still a liability.
Lenders will factor in the monthly payments, which can reduce how much mortgage you qualify for. It’s best to delay any major purchases like furniture or appliances, even if they offer 0 interest or deferred payment plans, until after your mortgage has been fully funded.
6. Transferring Your Down Payment to a Non-Personal Account
Lenders need to trace the origin of your down payment to ensure it’s not borrowed or from a high-risk source. Any transfer of funds to an account that’s not solely in your name, such as a joint account, a partner’s account, or a business account, can complicate the verification process. These transactions can appear suspicious to lenders, potentially suggesting the money was loaned or gifted without documentation, which may violate mortgage eligibility rules.
In many cases, lenders will require a full 90-day history for any account used to hold down payment funds. You’ll be asked to provide additional documentation, such as a signed gift letter, transfer records, or proof of withdrawal from savings, if you transfer money between multiple accounts or make a large deposit. This can delay closing or, in worst cases, lead to the mortgage being declined.
To avoid these issues, keep all down payment funds in one personal account in your name. Avoid last-minute transfers or unexplained deposits, and make sure your financial paper trail is clean and easy to document.
7. Missing or Making Late Payments
Timely bill payments are critical when you’re in the final stages of securing a mortgage. A single missed or late payment can lower your credit score and raise doubts about your financial reliability, potentially indicating financial stress. In some cases, unpaid bills may be sent to collections, which can appear on your credit report and raise concerns with your lender.
Lenders will often do a final credit check before funding, and any late or missed payments that appear could lead to delays or the approval being revoked. To protect your mortgage approval, ensure that all bills, even those under dispute, are paid on time and in full until your home purchase is officially closed and funded.
8. Co-Signing a Loan
Co-signing a mortgage or loan may make you feel like you’re helping out, especially if you’re supporting family or close friends. However, from a mortgage lender’s perspective, it creates more financial liability. When you co-sign a loan, even if you aren’t making payments, the entire obligation counts against your borrowing power.
The full amount is added to your debt service calculation, which can significantly reduce the amount you qualify for or push your ratio over approved limits, making it more challenging to be approved for the mortgage.
How to Protect Your Mortgage Approval Until Closing
After obtaining mortgage approval, your primary goal should be to maintain financial stability and keep things as they are. From the lender’s point of view, your approval is based on a snapshot of your finances at the time of application. Any changes between approval and closing can trigger a reassessment of your qualifying ability. That’s why it’s important to maintain the same financial picture until your mortgage funds.
This means avoiding new credit applications, preserving your employment status, and keeping your debt and savings stable. It also means maintaining clear records for any transfers or deposits related to your down payment. The more predictable your financial behaviour, the more confident your mortgage lender will be when it’s time to release the funds. Erring on the side of caution will help you avoid stressful delays.
Frequently Asked Questions (FAQ) About Mistakes to Avoid When Buying a Home
Why is it bad to apply for credit before closing on a home?
New credit inquiries and accounts reduce your score and add to your debt load. Even small changes can affect your debt ratios and raise red flags for lenders reviewing your file before closing.
Do lenders recheck my credit before funding the mortgage?
Yes. It’s more common than most buyers realize. Lenders sometimes recheck your credit a few days before funding to ensure there are no new debts, missed payments, or changes to your credit score. Any changes could delay or cancel your mortgage, even if it were approved earlier.
How long should I wait after closing to make big purchases?
It’s smart to wait until after the home has closed and your mortgage has funded before taking on new debt or making large purchases. This avoids any impact on your debt service ratios and complications with your lender.
Final Thoughts
Homeownership is a major milestone, but it’s also a financial balancing act. These eight common missteps can create unnecessary hurdles between approval and closing. By staying cautious with the financial decisions you make in between, you’ll keep your mortgage on track and avoid last-minute delays and stress.
A nesto mortgage expert can help you evaluate your options and build a mortgage strategy that protects your approval and aligns with your long-term financial goals. Whether you’re navigating job changes, gifted funds, or co-signing dilemmas, get expert advice tailored to your unique needs.
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