Top 10 things not to do before buying a home
Buying a home is a lengthy, complicated process. While you may buy another expensive product – such as a car – in a few hours, purchasing a home often takes months and involves walking through open houses, procuring a mortgage, negotiating a final deal and enduring the closing process.
Because landing a house can be such a strenuous and stressful effort, homebuyers often forget there are certain steps to avoid when buying a home. Some say he biggest mistake in these competitive homebuying days is not being prepared.
Here are the top 10 moves you should avoid before buying a house:
1. Don’t go with the first mortgage lender you talk with
Shopping around is so important. In the past, the only way to understand what rates might be for your mortgage was by calling or meeting with lenders. These days, mortgage rates are much more transparent, and the process is much better protected by the government. Understand how big of a house you want to buy, how much of a down payment you can make and how much of a mortgage you might need. Then, you can research companies online and reach out to an experienced mortgage loan officer.
2. Don’t shop for homes without getting preapproved first
In this competitive homebuying environment, home sellers and real estate agents want to know that you have a mortgage pre-approved for the amount needed and are ready to move forward quickly to make an offer on a home. Home sellers and agents don’t want to receive offers from people who cannot afford to buy the property. Take into account that preapproving a mortgage may take a lender a number of weeks to complete (whereas Guaranteed Rate’s Digital Mortgage takes the preapproval process to the next level with an automated underwriting of your loan file in minutes).
3. Don’t assume you need a 20% down payment
Down payment options as low as 3% may work fine and could potentially get you into a home much more quickly than having you work to save 20%. And getting into a home sooner allows you to build equity faster! True, mortgage insurance is required when a buyer has less than a 20% down payment. Mortgage insurance may be able to be removed once a certain amount of equity is built up in the property depending on factors like your loan type.
4. Don’t buy a house you can’t afford
A lender may offer you a $400,000 mortgage, for example. But can you make the monthly payments, especially considering other debt you may have? And don’t forget about all of the expenses associated with home ownership, from property taxes to insurance. Check a mortgage calculator to figure out the amount that makes the most sense for your budget and makes you feel most comfortable about being able to make your monthly payments.
5. Don’t make a big purchase using debt
Financing a big purchase before applying for a mortgage may negatively impact your FICO score and possibly impact your ability to get a mortgage at a better rate. Generally, the higher your FICO score, the better chance you have of obtaining not only a mortgage but also a lower rate. For example, if you buy a $25,000 new car using credit before applying for a mortgage, your credit score will be adversely impacted.
Whatever debt you take on before applying for a mortgage goes directly into the debt-to-income ratio lenders use to understand your financial health. In this case, a lower percentage is beneficial to you. If you owe $6,000 a month and your income is $8,000 a month, the 75% debt-to-income ratio is quite high and may be a red flag that you will have trouble paying off your mortgage. On the other hand, if you owe $2,000 a month with $8,000 in income coming in, that 25% debt-to-income ratio will be seen as much more positive than the first example.
Even more importantly, do not finance a big purchase after you apply for a mortgage. For example, if you buy thousands of dollars of new furniture for your future home on credit after applying for a mortgage, your credit score will be adversely impacted. If you take on new debt during the application, then the whole application may need to be redone, which can double your application costs – or in a worst-case scenario, lead to the rejection of your application.
6. Don’t ignore your credit history
Lenders are not fans of those who constantly avoid paying their credit-card bills on time. They like even less potential customers who have been subject to debt-collection suits. Check your credit report to see where you stand. If there are errors, make sure to request that they be corrected. And do your best to pay off your credit-card statements each month before you apply for a mortgage.
7. Don’t max out any of your credit cards
If you have a credit card with a $10,000 limit, don’t spend $9,000 on it before you have closed on your house. Any purchases that add up to put you near your spending limit will trigger lower FICO scores and thus a higher rate of interest on your mortgage. Try not to spend more than 30 percent of your limit on any credit card, and it will help your FICO score if you pay off your card balances each month.
At the same time, closing an active credit account can send a sign that you’re not able to pay your statement, and it will impact your credit history because it will be removed from your credit report. Once you’ve closed on the house, however, closing credit-card accounts is fine.
8. Don’t cosign a loan
You decided to be a cosigner on a loan because the person getting the loan couldn’t qualify on his or her own – whether because of his or her credit history or other factors. A cosigner effectively acts as a backup source of repayment should the primary borrower fail to keep up with installments.
If you are a cosigner on a loan, that will hamper your chances of getting a mortgage. The lender may not think you would be able to pay those potential debts along with the principal and interest on your mortgage.
9. Don’t change jobs
Lenders want to ensure that a borrower can pay off all of the principal and interest on a mortgage. Having an employment history of at least two years is the standard requirement to receive a mortgage backed by Freddie Mac or Fannie Mae. It is possible to get a mortgage without that employment history, but that will require greater scrutiny to get approved.
Changing jobs, changing companies or changing careers is not always a negative, as long as the borrower will continue to have the same or greater earning potential. If at all possible, you should not quit a job without having a written offer in hand for the next position while searching for your house.
10. Don’t skip the home inspection
Home inspections protect the buyer by unearthing flaws that may be expensive to correct. Don’t expect the seller to set one up; the home inspection is the buyer’s responsibility. The expert you hire will check everything from the electrical systems to the plumbing to the major appliances. The cost of the home inspector, which is often a few hundred dollars, is well worth knowing that you won’t be on the hook for thousands of dollars of repairs.
Buying a home is one of the biggest investments you’ll ever make – if not the biggest. You know the basics about how to proceed – finding a real-estate agent, checking out possibilities online – but knowing what to avoid is just as important. By following the guidance outlined in these 10 steps of what not to do when buying a home, you will set yourself up for success as you start searching for your dream house.
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