Buying your first home can be an exciting and stressful experience. Not only do you have to find the right place, but you also have to find the right mortgage. With inventory low in many local markets and rising home prices nationwide, finding an affordable home can be a challenge.
You may feel pressure to find a home right away, but before you visit the house and start offering, your financing needs are in order. This includes making sure your credit history and score, debt-to-income ratio, and general financial situation convince lenders that you have enough credit to take out a loan.
Many first-time homebuyers tend to make some mistakes during the mortgage and home buying process. Here are some of the most common mistakes to avoid.
- Obvious credit problems – a history of late payments, debt collection actions, or significant debt could mean less-than-ideal rates and conditions, or even outright denial.
- Improve your score by paying your bills on time, paying more than your monthly minimum loan payments, and not maximizing your available credit.
- Sellers are more likely to consider offers from buyers with pre-approval letters from lenders.
- Apply for a mortgage with a small number of lenders to better understand your affordability and compare loan products, interest rates, closing costs, and lender fees more clearly.
1 Not paying attention to your credit
No one likes surprises, especially before buying a home. If you or your spouse have obvious credit problems, such as late payments, debt collection practices, or significant debt – the mortgage lender may offer you sub-optimal rates and terms (or outright deny your application). Either situation can be frustrating and can push back your ideal schedule.1
To address potential issues in advance, visit annualcreditreport.com annually from three credit reporting agencies: Transunion, Equifax, and Experian. Find errors and dispute any errors in writing with the reporting agency and creditor, including helping clarify supporting documents of the situation. For more proactive help, consider using the best credit monitoring service.
If you find current but accurate negative items such as overdue payments or delinquent accounts, there is no way to quickly delete those items. Unfortunately, they stay on your credit report for 7 to 10 years. However, you can improve your score by paying your bills on time, paying more than your monthly minimum loan repayments, and not maximizing your available credit. Most importantly, be patient. It takes at least a year to improve a low credit score.
Also, check to see if your bank, credit union, or credit card provider allows you to access your credit score for free. If your score is below 620, you may have a hard time getting approved for a regular mortgage. To qualify for an FHA loan, you need a minimum credit score of 580 to use the program's maximum financing amount (3.5% down payment), or a minimum credit score of 500 and FHA requires a 10% down payment. ” Credit Requirements for FHA Loans ” Reviewed: December 22, 2020.3
Find a house before getting pre-approval
When you've found the perfect home, there's no time to waste. In many popular markets, you will face multiple bids and stiff competition. Sellers are unlikely to consider an offer without a buyer's pre-approval letter from the lender. A pre- The approval letter shows the seller that the lender has done due diligence based on your credit history and score, income and employment history, financial assets, and other key factors to ensure you have the means and motivation to pay your bills.
In a competitive market where sellers won't take you seriously without prior approval, you could lose a home you want. This document lists your eligible loan amount, your interest rate and loan plan, and your estimated down payment. In some cases ( especially in high-cost homes or in a hyper-competitive market), the lender may require you to provide funds to prove a down payment on a project. The pre-approval letter also includes an expiration date, usually within 90 days.
Not shopping around for mortgages
Homebuyers can leave a lot of money on the table by not shopping around for a mortgage. Applying for a mortgage with several different lenders gives you a better feel for what you can afford and lets you do a comparison of loan products, interest rates, closing costs, and loan fees. What's more, buying a mortgage puts you in a better position to negotiate with lenders to get the best deal possible.
When you shop, keep an eye on fees and prices at the end of the period, which can be added up in the closing table. While some pricing differences may seem small on paper now, they can provide significant cost savings over the life of your loan. Keep in mind that some lenders will offer you discounted “points,” a way to buy your interest rate in advance. This will increase your checkout costs. Others, which advocate low or no closing costs, tend to charge higher interest rates to make up the difference. According to a 2019 survey by real estate closing cost data firm ClosingCorp, US homebuyers pay an average of $5,749 in closing costs.5
In addition to checking with your current financial institution (bank or credit union), you can also ask a mortgage broker to buy rates on your behalf. Mortgage brokers are not lenders; they act as matchmakers in your network with lenders. They can save you time and money by comparing multiple lenders that have products that fit your needs. Also, it's worth investigating some direct lenders online or in-person to see what they offer.
By applying for a mortgage from several lenders, you will receive loan estimates to compare interest rates and closing costs side by side. Also, if you do most of your rate shopping within 30 days, the multiple credit checks performed by the lender will be considered a tough inquiry and less likely to lower your credit score. There is no gold quantity for the loan you should buy, but having three to five loan estimates on hand will give you a strong basis for comparison.
4 Buy a house that is more expensive than you can afford
When a lender tells you you can borrow $300,000, it doesn't mean you should. If you maximize your loan, your monthly payment may be unmanageable. Generally speaking, most potential homeowners can afford a loan amount of 2 to 2.5 times their gross annual income.
In other words, if you make $75,000 a year, you can probably afford a house that costs between $150,000 and $187,500. The Investment Department Mortgage Calculator can help you estimate monthly payments, which is a better barometer payment of whether you can afford a house in a certain price range.
Mortgage discrimination is illegal. If you feel you have been discriminated against based on race, religion, gender, marital status, use of public assistance, national origin, disability, or age, you can take the following steps. One of these steps is to file a report with the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
Buying a house that's more expensive than you can reasonably afford can get you into trouble if you have to stretch your monthly budget to pay the mortgage. In other words, you may feel “the house is bad” and experience buyer's remorse.
Also, take into account the additional costs that come with homeownership in addition to these monthly mortgage payments. You'll need to save money for unavoidable maintenance costs, repairs, insurance, property taxes, homeowners association fees (if applicable), and other expenses that you don't have to pay as a tenant.6
Extending your monthly budget to pay your mortgage can also mean you can't save for emergencies or those home repairs, which can also drain your cash flow for other financial goals.
Don't focus on the maximum loan amount you're approved for, but on whether you can afford the monthly payment at that price. First-time homebuyers may be extra cautious, buying below their maximum budget.
5 Not Hiring a Realtor
Trying to find a home on your own is time-consuming and complicated. A professional, experienced real estate agent can help you narrow down your options and spot problems (whether with the physical property or during negotiations with the seller). Some states require a real estate attorney to handle the transaction, but attorneys won't help you find a home; they can help you draft offers, negotiate purchase agreements, and act as closing agents.
Also, if you don't have your real estate agent to see the property, the seller's agent may offer to represent you. This can be dangerous because the agent doesn't have your interests in mind; their goal is to get the highest and best offer for the seller. Having your surrogate whose interests are more aligned with yours will help you make more informed choices.
Best of all, the cost of recruiting agents doesn't go straight out of your pocket. As a buyer, you generally do not pay a buyer's agent commission. It is usually paid by the seller to the seller's agent, who then splits the commission with the buyer's agent.
6 Open (or close) a line of credit
You can still decline a mortgage, even if one is pre-approved. Mortgage lenders check your credit before pre-approval and give you the final green light again before closing. In the meantime, maintain your credit and financial standing. This means not opening new lines of credit or closing existing ones. Doing so can lower your credit score and increase your debt-to-income ratio, two key reasons lenders deny final approval.
Instead, wait until your house closes before applying for a new line of credit (like a car loan or a new credit card). While it's good to pay off your credit card account or loan before you close the house, closing the account will remove the credit history from your report. Credit length is one of the key factors used by credit reporting bureaus to generate your credit score.7
Instead, keep the account open and active, but don't use it until it's closed.
Some credit card companies may close your account for prolonged periods of inactivity, which can also negatively affect your credit. Keep your account active, buy small items and pay in full immediately each month.
7 Bulk purchases on credit
Just as opening or closing a line of credit can lower your score, so can adding to an existing account. Again, keep your credit and financial stability until you close your home. Use cash instead, or better yet, hold off on buying new furniture or TVs until after the doors close.
Plus, you want to know how your budget will handle your new homeownership costs. You may have to wait a few months before increasing the monthly payment for larger purchases.
8 wandering around
Another big no-no in mortgage underwriting: making large deposits or withdrawals from bank accounts or other assets. If a lender suddenly sees money flowing in or out without a source, it may look like you got a loan, which can affect your debt-to-income ratio.
Lenders aren't worried about the transparency of deposits, such as employer bonuses or IRS tax refunds. However, if a friend wires money to you, or you have business income in your account, the lender will ask for proof that the deposit is not a disguised loan. Expect the lender to ask for a sales note (if the deposit came from something you sold), a canceled check, or a payment stub.
You can use gifts from relatives or friends as your down payment. However, many loan products require gift letters and documentation to find the source of the deposit and verify that the donor does not want you to pay back the money.
9 Change jobs
While changing jobs can benefit your career, it can complicate your mortgage approval. Lenders want to make sure you have a steady income and employment and that you can afford to pay off your mortgage. If you're pre-approved for a mortgage based on a certain income and job, any opportunity during the transition period before closing could be a red flag and delay closing.
To be approved, you will usually have to provide proof of stable employment and income for two consecutive years. When you change jobs, streaks of income and employment are broken, especially when you're in a lower-paying job.
Also, if you switch to a position that pays 25% or more in commission, you must demonstrate that you have earned this income for two consecutive years. Whenever possible, lenders recommend waiting until the loan closes before changing jobs. If this is not feasible, tell your lender right away.
10 Skip Home Inspections
Unless you have a lot of cash to renovate your home and are willing to risk having to pay for unexpected repairs, forgoing a home inspection can be a costly mistake. Door-to-door inspections are there to find major problems With a house, they're there to protect the buyer.
If you don't get an inspection, you will have no recourse if a major problem, such as a cracked pipe or water damage, surfaces after you shut down a home. This means that you may be responsible for the full cost of fixing these issues. When you offer a home, you can include a home inspection contingency that lets you exit the deal for free if a major problem is discovered that the seller is reluctant to fix before closing.
With such a contingency, you can withdraw your offer and usually get the full money deposit refunded. The home inspection fee is non-refundable and is usually paid by the buyer to the buyer's home inspector upfront. Prices typically range from $300 to $500, depending on the location and property size. That's a small price to pay when you weigh the potential cost of having to replace a furnace, water heater, roof, or another big-ticket item that could rise into the thousands.
You may consider additional inspections such as pest inspections, mold or radon inspections, or sewer coverage, for example, if required by your lender. These and other checks can help protect your investment and safety.
11 Not comparing loan estimates with period-end disclosures
Your lender is required by law to provide you with a closing disclosure three business days before your closing date. This document sets out the exact costs you expect to pay at closing, including your down payment, closing costs, loan details and terms, and other important information. This is a five-page document; take the time to compare it to the initial loan estimate you received to make sure you are not being charged an additional fee (called a junk fee ) by your lender or other parties involved in the transaction square.8
Also, if certain fees rise more than expected, ask your lender to explain why. Make sure basic details, such as your name and other identifying information, are listed correctly so you don't run into paperwork issues on a closed day. If you notice errors or suspicious or unexplained additional charges, tell your lender immediately so these issues can be resolved. In some cases, your closing may have to be delayed to ensure that paperwork is corrected and updated and all issues are resolved.
You don't want to unintentionally ruin your mortgage and home purchase. Some of these mistakes may seem innocent, but they can stray from your closing direction and cause huge trouble.
Talk to your lender about what you should do, from pre-approval to closing, to ensure a smooth process. And try to keep all your documents bank statements, W-2s, deposit records, tax returns, payment stubs, etc. organized and updated so that you can provide documentation if your lender requests it.
When it comes time to buy your first home, having a solid understanding and education about the loan and real estate process can help you avoid these mistakes, not to mention save money along the way. To further ensure the transaction runs smoothly, you are guided by a trained and experienced professional on your side. This reduces stress and complexity along the way.