Prepare for Success in Home Buying
In today's highly competitive housing market, buyers must be strategic to get the home they want.
Fortunately, there are some simple best practices you can follow when looking for a home and applying for a mortgage that will put you on your path to success.
Knowing what to expect – and how to avoid common home buying mistakes – can give yourself the best possible chance of evaluating the home you want. Here's what to do.
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Mistakes can be costly when buying a home
As you prepare to take out a mortgage and buy a new home, it is important to clean up your personal finances and present yourself as a strong loan candidate.
But that doesn't just mean saving money on a down payment and closing costs.
It also means avoiding common financial mistakes that can reduce your creditworthiness – or, in the worst case, even result in being denied a mortgage.
"Most buyers are so busy just saving for a down payment and getting their foot in the door that they forget about the little details that can trip them up – like poor creditworthiness and paying off their debts," says Michele Harrington, COO of First Team Real Estate.
Don't get so caught up in saving and apartment hunting that you forget about other details that may affect your mortgage.
Khari Washington, broker and owner of 1st United Realty & Mortgage, agrees.
"It is easy for a homebuyer to make mistakes during this process because this transaction is one of the most expensive things a person does in a lifetime," says Washington.
“Buying a home involves many different activities at the same time. There are house condition issues, mortgage financing issues, contract negotiation, and valuation issues, all of which can create problems, distract you, and misjudge you if you're not careful, ”he warns.
So what do you have to look out for? And how can you be successful?
7 things you should never do before buying a home
Here are some of the most common mistakes first time home buyers make, why they matter, and how to avoid them.
1. Do not finance a car or other large item before buying it
Jim Roberts, president of True North Mortgage, says the biggest mistake buyers can make is getting a car right before applying for a mortgage loan.
“It's equally problematic when buyers want to buy new furniture and appliances on credit before their new mortgage expires,” he explains.
“All of these activities are a big no-go as lenders do a final credit check prior to closing. if new debts are added, this could jeopardize the loan approval. "
And it's not just your FICO score that is at risk.
Taking out a loan for a car or financing an important item like a boat, wedding, or vacation can increase your debt-to-income ratio (DTI), making you look like a less attractive borrower to a lender.
"If your DTI is above a certain threshold – typically around 43% – you are considered a risky borrower," warns Harrington. "Avoid making major purchases or financing a new car for six months or a year before you want to buy a home."
2. Don't maximize credit card debt
Deposing on a credit card is one of the worst things you can do before you get a home loan.
"The extra amount of debt offsets your income and results in less mortgage financing," says Washington. "It will also lower your credit score, which could increase the cost of your loan."
Roberts notes that the actual debt amount doesn't matter in the credit scoring system – you could owe $ 2,000 or $ 20,000.
"What they care about is how much you owe in relation to your credit limits“Says Roberts.
"If you owe $ 2,000 and your card limit is $ 2,500, your card is almost full and this results in drastically lower credit scores – resulting in higher rates and monthly payments when it comes to a loan," he explains.
For the best mortgage rate – and in the interests of low debt – try to keep your credit utilization below 30% of your total credit line.
For example, if your credit card allows up to $ 3,000, try keeping a balance below $ 900. And pay off the card in full every month if you can.
This will improve your credit score, reduce your debt, and help you qualify for the best possible home loan.
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3. Don't quit your job or switch careers before you buy
Proof of steady employment is essential when applying for and approving a mortgage loan.
"Job changes can create lending issues, especially if your pay structure changes from salary to commission, as it requires a longer track record – typically two years when it comes to commissions," adds Roberts.
“Switching from salary to hourly wages can also create lending problems, as hourly earners can vary their income simply based on the hours they work,” he explains.
Roberts rule of thumb? Aim for a consistent employment history of two or more years with the same employer or at least in the same industry.
For example, if you're already in accounting, switching from one accounting firm to another right before buying a home isn't going to raise red flags for your lender.
However, if you move into an entirely new field – from accounting to hairdressing, for example – you will likely have to work in the new industry for a full two years before you can qualify.
4. Don't assume that you need 20% down
Many first-time buyers assume that they will need a 20 percent down payment to buy a home. But while there are benefits associated with a 20 percent decrease – like avoiding personal mortgage insurance (PMI) – it's not always the best option.
Waiting until you get 20 percent less can cut your home buying schedule by years. And the longer you wait to buy, the higher home prices you'll be chasing – which likely means you'll need an even bigger down payment.
Fortunately, there are several loan programs available today that require little or no down payment. These include:
"Also, some conventional loans can only charge 3% less when you pay for mortgage insurance," Washington said.
Typically, if you're paying less than 20 percent, you'll have to pay for mortgage insurance. But the good news is that mortgage insurances now charge lower monthly premiums for borrowers with good credit ratings than they did years ago.
"Often times it makes sense to put less money on deposit and pay off other debts instead of trying to cut 20 percent on a house just to avoid mortgage insurance," says Roberts.
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5. Don't buy homes without prior authorization
Before you start looking for a home, it is important to obtain pre-approval for a mortgage. Otherwise, you could expect disappointment.
“If a potential buyer finds a home they love and then tries to get pre-approved for a loan, the home may be gone before the pre-approval is complete. Additionally, many sellers only want to show their home to reputable buyers and require the buyer to provide a pre-approval letter, "says Washington.
There is another compelling reason to get pre-approved early in the process.
“Often times, you don't know how much home you can afford until you get pre-approved by a lender,” says Harrington.
The pre-approval process involves applying to a lender who will review your income, creditworthiness, and assets. Only after reviewing these documents can a lender approve you for a home loan and tell you your actual price range.
6. Don't go with the first mortgage lender you speak to
You look forward to claiming a home and want to speed up the process. So you apply to a mortgage lender and move on once you've been approved.
The experts agree: this is a big mistake.
“Although many lenders have prices very close to others in price, some lenders charge above-average rates. Getting a bad loan with a higher interest rate can be very expensive in the long run, so do your research and get written quotes from various mortgage lenders, ”recommends Washington.
One of the biggest misconceptions among borrowers is that their longstanding bank gives them the best deal.
"Typically, large banks are significantly more expensive than a good mortgage broker or other lender in terms of both interest rates and closing costs," warns Roberts.
So when solving quotes, try a few different types of lenders. Check with your current bank for interest rates, but also check out online mortgage lenders, credit unions, and maybe even a mortgage broker.
You won't know who can offer you the best deal until you've compared personalized price quotes from at least 3-5 companies.
Find your lowest mortgage rate. Start here (14.09.2021)
7. Don't make major financial changes before closing
Once you have a signed sales contract and have been approved for a home loan, you go through the final stage of underwriting.
This is mostly a waiting game while the lender re-examines your finances and gives final approval. But don't be lulled into thinking it is a deal. Nothing is official until you sign the final closing papers.
The last thing you want to do while waiting for the final loan approval is to make major financial changes such as:
Significantly increase your credit card balanceOpen a new credit cardChange jobApply for new loans or lines of credit
“It's tempting to use extra cash to buy thousands of dollars' worth of furniture or to open a Home Depot credit card so you can save money on new equipment. But these steps can easily upset the delicate balance of your DTI and affect your credit score so that you no longer qualify for a loan, ”notes Harrington.
Remember: the loan approval is not final until the loan financing, at which point the house will be in your name.
"But before that point, a lender can withdraw approval if the buyer's situation changes significantly," says Roberts.
So keep a financial downturn before closing and don't do anything that could jeopardize your final approval – and your home purchase.
Best Practices When Buying a Home
To improve your chances of getting a mortgage approval and a lower interest rate, you should be financially cautious in the weeks and months leading up to a home loan application.
Roberts suggests three best practices that you should follow before buying a home:
First of all, do not close any active credit accounts. Keep all active revolving accounts open next, do not apply for new credit accounts or open new credit accounts
Of course, you want to save as much money as possible.
Remember, your down payment is not the only advance payment you need to make to buy a home. You'll also need to pay the closing cost, which is typically 2 to 5% of the loan amount (or $ 2,000 to $ 5,000 for every $ 100,000 borrowed).
You should also keep an eye on any large deposits in your bank accounts. "If you're making deposits into your checking or savings accounts that aren't pay slips, you need to be prepared to document where they came from," adds Roberts.
Finally, review your three free credit reports (available at Annualcreditreport.com) and work to correct or remove any errors or inconsistencies you notice there.
Summary: what not to do before buying a home
Yes, it is a competitive market. But there are still homes for savvy buyers.
To recap, here are the seven things that you should never do before buying a home:
Take out a car loan or fund other big things Maximize your credit cards Quit job or move to a new field Say you need 20% less House hunting before getting pre-approved Use the first mortgage lender with that you're talking about make big financial changes before closing
As long as you avoid these home buying mistakes – and keep your finances in excellent shape – you should be on the right path to home ownership.
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