Mistakes happen
Whether you’re on the verge of becoming a first-time homeowner or this is your second time around, homebuying mistakes can happen. Still, it doesn’t hurt to make a concerted effort to avoid as many mishaps as possible.
Here are 11 common homebuying mistakes and some expert advice to help you avoid them.
1. Not gathering quotes from multiple lenders
Just as you’d shop around to find the best deal for any other product, it’s wise to shop around for a mortgage lender. Getting mortgage rates and loan estimates from multiple lenders may save you more than $30,000 on a 30-year, fixed-rate $300,000 loan, according to LendingTree’s latest Mortgage Rate Competition Index.
When you’re ready to gather mortgage offers, pick at least three to five lenders and request quotes on the same day to help you truly compare apples to apples. Aside from the estimated mortgage rates, pay attention to the quoted lender fees and third-party closing costs.
“One of the most important steps in the homebuying process is to find a lender who is a good fit in costs but also in service provided,” said Christopher Totaro, a real estate agent with Warburg Realty in New York. “Now more than ever with credit shrinking and lenders getting stricter with requirements, it’s wise to find a lender who’ll be very responsive as well as highly informative.”
2. Shopping for a home without a mortgage preapproval
There’s no need to tour any properties if you don’t know which homes fall within your budget. That’s why skipping a mortgage preapproval is a major homebuying mistake.
A preapproval is an initial mortgage offer from a lender, based on a review of your credit history and finances. It comes in the form of a letter and details the loan terms you may qualify for, including:
- Estimated loan amount
- Loan program
Sellers are more likely to consider your offer if they know they’re dealing with someone who already has a mortgage pre-approval, said Karen Hoskins, vice president of national homeownership programs and lending at NeighborWorks America, a community development nonprofit.
3. Buying more than you can afford
Seeing that maximum loan amount on your pre-approval letter doesn’t mean you should look at homes that are priced to match it. Remember this crucial piece of homebuying advice: Don’t buy more house than you can reasonably afford.
Your pre-approval doesn’t factor in your other expenses, such as school tuition, health care, home maintenance and utilities. Pay attention to the monthly payment amounts rather than the overall loan amount to determine whether you can afford a home in a certain price range.
If maxing out the loan amount you qualify for means you’re stretching your monthly budget to its limit, search for a more affordable home. This way, you won’t make a homebuying mistake that you’ll regret later.
4. Assuming that buying is always better than renting
There’s a sense of pride and accomplishment that comes with homeownership, but that doesn’t mean it’s the right choice for everyone.
If you prefer to move frequently or don’t want to be bothered with covering the costs of maintaining and repairing your home, renting might work better for your lifestyle. Take time to consider whether buying versus renting a home is right for you.
5. Believing that you need a 20% down payment
When you make a bigger down payment on your home purchase, you’ll likely snag a better mortgage rate and a lower monthly payment, since you’re not borrowing as much. But that doesn’t mean you should hold off on buying your first home, or upgrading to a new one, until you have a 20% down payment.
“There’s still a long-standing myth that you need 20% down in order to purchase a home,” Hoskins said. “In most cases, that’s absolutely not correct.”
You can get a conventional loan with as little as 3% down or a loan backed by the Federal Housing Administration (FHA) with just 3.5% down. There are also 0% down payment programs available if you’re in the military, or you’re a low- to moderate-income borrower buying a home in a rural community. Plus, some first-time buyers may qualify for a down payment assistance program through their state or local housing agency.
6. Saving only enough money for a down payment
Your down payment isn’t the only upfront cost you’ll have as a homebuyer. There are also closing costs, which can range from 2% to 6% of your loan amount. On a $200,000 loan, you could pay $4,000 in closing costs on the low end.
Closing costs typically include but aren’t limited to:
- Loan origination and underwriting fees
- Home appraisal fees
- Home inspection fees
- Title search and insurance fees
- Prepaid interest charges
7. Neglecting to consider all the costs involved
A home’s sticker price and the monthly mortgage payment that comes with it aren’t the only expenses you’ll pay to own a home. There are several other costs of homeownership, including multiple utility bills and, if you live in a community with a homeowners association, HOA dues.
“The costs not often considered are the unforeseen repairs, moving costs and having a budget for delays, like needing a hotel if timing doesn’t work out exactly as you had planned,” Totaro explained. “Also, try to avoid impulse purchases based on the excitement of being in your new home.”
In addition to what you’ve set aside for your down payment and closing costs, it’s wise to have three to six months’ worth of living expenses stashed away in an emergency fund.
8. Applying for or charging up credit before closing
One key homebuying mistake to avoid: Taking on more debt in the middle of the mortgage lending process. This misstep can quickly derail your loan approval.
“I recommend to my clients that they don’t take on any new debt or even apply for a credit card until after closing on their new home,” Totaro said. “The loan underwriting department at the bank may be checking your credit after you’re approved and before the bank funds your loan.”
If you max out your credit card or take out an auto loan before your closing, that debt is factored into your mortgage application. More debt pushes up your debt-to-income (DTI) ratio, or the percentage of your gross monthly income used to repay debt. If your DTI ratio exceeds the maximum ratio for your loan program, your loan may not be approved.
9. Forgetting to keep a paper trail for cash gifts
If you have a close friend or relative helping you cover your down payment, you’ll need a paper trail for the money gifted to you.
Most lenders require documentation showing the gift money leaving your donor’s bank account and being deposited into yours. The donor also needs to provide a statement verifying that the money doesn’t have to be repaid — otherwise, it’s another loan that affects your DTI ratio and overall eligibility.
10. Changing jobs or having gaps in income
You need a stable job history and consistent income to qualify for a mortgage, and your lender will scrutinize your income and employment history over the last two years to determine whether you have that stability.
If you’ve been in between jobs in the past two years, be prepared to explain why.
“[The] cost of money or the interest rate is based upon several factors, including risk assessment, so it’s wise to have detailed explanations to any potential questions,” Totaro said.
If you’re looking to take a new job before closing on your mortgage, be strategic because it may delay your loan approval. Communicate potential job changes to your loan officer and supply any additional documentation they may request.
11. Not responding promptly to your loan officer’s document requests
You can make your loan officer’s job a lot harder — and hurt your chances of making it to the closing table — if you don’t send the exact documents requested promptly.
“Time kills deals,” Totaro said. “If you want to buy that house, be organized and proactive, and have your financial house in order before you go to the bank.”
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