Borrowing money

What is a big purchase during the subscription?

How to determine if a purchase will be considered major by your lender

Whether a purchase is considered major by the lender depends on your situation. Here’s when a purchase could be a dealbreaker for your lender.

Debt-to-income ratio (DTI)

When you take out a mortgage, you assume a significant debt. With that, it makes sense that lenders take your DTI ratio very seriously.

In fact, most lenders set a limit on how high your DTI ratio is. In most cases, this limit is 43%. A DTI ratio higher than this would make you ineligible for most conventional conforming loans.

Not sure what your DTI ratio is? It’s easy to calculate. Add up your monthly debts, then divide that amount by your gross monthly income. If a purchase changes your DTI ratio, it will likely affect your mortgage application. Depending on the change, a lender may even decline your mortgage purchase.

For example, Rocket Mortgage offers Verified Approval, which in fine print guarantees that unless new information materially changes the underwriting decision resulting in a denial of the borrower’s credit application, among other things, they will receive a payment of $1,000 if they don’t close their pre-approval. One thing that can dramatically change your financial situation is an increased DTI.

If you plan to add another debt to your monthly bills, try to wait until after closing. Otherwise, the lender may completely deny your request.

Use of credit

Credit utilization is another important factor in the underwriting process. Essentially, your credit usage reflects how much of your available credit you are using.

For example, suppose you have a credit card with a limit of $10,000. If you have a balance of $5,000, your credit utilization would be 50%. Generally, a higher credit utilization score will cause your credit score to drop.

It’s also possible to see your credit score drop after a big purchase. Indeed, a new credit account can make it more difficult to meet your loan obligations. If you increase your credit usage to open new credit accounts, it could negatively impact your loan application.

Emergency Reserve Fund

An emergency fund can help cover unexpected expenses. As a new homeowner, expenses are likely to arise as you settle into your new home.

Lenders want borrowers to have reserves to cover unexpected expenses. Plus, a strong emergency fund can help you keep making mortgage payments even if you lose your job.

So if you need to dip into your emergency funds to cover a purchase, a lender might not follow through on your loan request.