Overview
Being prepared to buy a home will be the make-or-break between a successful transaction or one that ends in complete frustration and nothing to show for in the end. The real estate market is a competitive landscape and as a buyer, you need to make sure you are well-prepared and have all your ducks lined up to succeed. Some of the items below may seem trivial, however, they can lead to major headaches in trying to purchase a home.
Not Managing Your Credit Score and Factors Impacting It
A history of late payments, debt collections, or having a significant amount of debt will result in higher interest rate, being able to afford less, or not being approved at all. In the year leading up to your purchase, focusing on increasing your score by paying bills on-time, paying down debt, and not maxing out credit cards.
Get a free credit report at freecreditreport.com and sign up for a credit monitoring service in order to track and boost your score. The annual free credit report from Transunion, Equifax, and Experian will allow you to see your debt reported across each of the agencies and make any corrections.
If you are borrowing with your spouse, the lender will use the lower of the two credit scores, so focus on both credit reports.
Items like delinquent accounts, bankruptcies, or items that have gone to collections can stay on your credit for 7-10 years and have an adverse impact.
You can also check your bank or credit card company as they often provide free access to your credit score. If your score is below 620, you may have trouble getting approved for a conventional mortgage. To qualify for an FHA loan, you’ll need a minimum credit score of 580 to use the program’s maximum financing (3.5% down payment). For jumbo leans, you will need a score in excess of 700. Also, you need to realize that not all scores are the same and the lender FICO score is the most important when it comes to the decision whether to extend credit.
Opening New Credit or Making a Big Purchase on Credit
If you are planning to buy a home, do not plan to open a line of credit or make a big purchase such as a car or home furnishings or appliances before or during the process. Doing this can hurt your credit and also decrease the amount of home that you can qualify for. You should also get used to the mortgage payment and the costs that come with homeownership before diving into more debt. Making these purchases after pre-approval can also prove detrimental as your loan still has to go through final approval and that includes running your credit report as one of the final conditions.
Transferring Money Between Accounts or Large Deposits
Before you purchase your home, avoid moving large sums of money around your accounts that you are going to use as proof-of-funds for your down payment. Large sums of money coming in or out of the account looks like more debt has been taken on as a disguise for a loan.
Gift money is allowed to come into your account from a friend or relative to use as sources of funds for your down payment, however, they require a gift letter and documentation to show the transfer out of the account of the person giving the gift and into the account of the person receiving it. The letter must also state that the person giving the gift does not expect to be paid back.
Items such as bonuses, tax refunds or other large deposits do not get as much scrutiny as the other items stated above.
Unfiled or Unpaid Taxes not on an Installment Plan
If you owe the IRS or the state money, you need to make sure that you have either paid it off or are on an installment plan that has been in place for at least one month for conventional financing and three months for FHA, however, should be verified with your lender up front as guidelines can change. Unpaid taxes can result in lien on your property and during the underwriting process these items will be uncovered and can result in your loan being denied. As long as you have filed your most recent returns and show a history of making payments on your installment plan, you can still get approved for your loan. Your monthly installment plan to the state or the IRS will go against your debt-to-income ratio, so be sure to communicate it to your lender during the pre-approval process to avoid your loan being denied during final underwriting while under contract to purchase your home.
Switching Jobs
Changing your job can be beneficial to your career, however, it causes headaches in the loan approval process as your lender wants to see two years of steady income. Be transparent with your lender if you recently changed or plan to change jobs as part of the pre-approval process in order to provide substantial documentation to satisfy the lender requirements.
If you work in a job that is 25% more in commission of your annual salary, you will have to demonstrate two years of earning that income in order to use the highest amount for loan approval.
In the ideal world, it is best to wait to switch jobs until you buy your new home, however, we realize that a lot of times people are purchasing homes because of job relocation. In these instances, sufficient documentation should satisfy the lender underwriting requirements in order to get final loan approval as part of the close of your transaction.
Not Hiring a Real Estate Agent
A real estate agent will help you narrow down your search, ensure you are completing all the steps along the way to ensure a successful transaction and have a fiduciary duty to protect your interests. Walking into an open house and potentially working with that listing agent to represent you can become troublesome as they are working for the seller trying to get the best price possible and may not have your best interest. They may also angle the deal in favor of the seller and not advise of potential issues that could cause you as a buyer to walk away.
Most importantly from a buyer perspective is that the commissions paid to the agent are free to you as the seller in almost all cases pays the commission as part of the transaction.
Not Getting Pre-Approved before Viewing Homes
When you find the ideal house that meets your lifestyle goals and financial budget, there’s no time to waste. In a hot market, you could be in a multiple bid situation and without a pre-approval, your offer will be dead in the water.
A pre-approval letter shows a seller that the lender has done its due diligence to ensure you have the means and motivation to repay your bills based on your credit history and score, income and employment history that can support a mortgage payment, the financial assets for the down payment, and other key factors. The pre-approval lists out the loan amount for which you qualify, your interest rate and loan program, and your estimated down payment amount. The pre-approval is generally good for 90 days.
In addition to providing a pre-approval to be considered a serious buyer by the home seller, they may also ask that you provide proof of funds for the down payment.
Not Shopping for and Analyzing Different Lender Products
As a buyer, you should shop for and analyze different loan products, interest rates, closing costs, and lender fees in order to negotiate with the lenders for the best deal possible. Lenders offer different products and it can make a difference in the monthly payment and up front costs due at closing. Many lenders offer discount points which allows you to buy down the interest rate for a lower monthly mortgage, however, you will pay for this as part of the additional closing costs.
You should check with your current bank and also have a mortgage broker that will shop around for the best mortgage for you in terms of the combination of interest rate, monthly payment, and up-front costs. Ideally you should have a minimum of three offers to compare.
Not Factoring in Closing Costs
A good rule of thumb is to factor in approximately 2-5% in closing costs depending on the size of your transaction. During the pre-approval, your lender will provide an estimate of closing costs which include escrow fees, inspections, loan fees, title, transfer fees, etc. It’s important to understand that your down payment on equity in your home needs to be grossed up for closing costs to come up with your total down payment in order to close the transaction. Closing costs are negotiable with the seller and are a part of the Residential Purchase Agreement in terms of who pays for what. Depending on if you are in a buyer or seller’s market, this will dictate how much wiggle room you have to negotiate and ask for seller to pay for more than customary.
Buying Beyond Your Means
Most prospective homeowners can afford a loan between 2 and 2.5 times their gross annual income, so as a buyer you should not get attached to the maximum amount that you can afford. If you buy the absolute top-end of your pre-approval, you may be stretched beyond your means and not have the emergency funds to cover a large home repair or other need outside of the house. Nothing is worse than having buyer’s remorse and feeling poor after your purchase.
Make sure that your budget factors in insurance, maintenance, property tax, and any mello-roos or HOA and that you have sufficient funds at the end of the day to cover your other living expenses plus saving for the future.
Lastly, buying more home also means a higher down payment which can further deplete your cash reserves and leave you in a dire situation in the event of an emergency or job loss where you do not have enough funds to cover your living expenses beyond a couple of months.
Not Getting a Home Inspection
Once you are under contract, it is a customary contingency in the deal to have a home inspection and for the buyer to request any major repairs from issues that are uncovered. The home inspection is meant to protect you as the buyer and avoid costly issues that could be discovered after the close if you waive the inspection. Many lenders also require a home inspection in order to approve your loan.
The home inspection is typically paid by the buyer and runs $300-$500. If major issues are uncovered, it is one of your protections to walk away from the deal and get your earnest money deposit back.
Additional inspections are also important depending on the property, including a pest or termite inspection, mold, or other. Find out from your lender during the pre-approval process what they will require as well so you don’t have issues receiving final loan approval.
Not Comparing the Loan Estimate to the Closing Disclosure
Within three days prior to the closing date, your lender is required by law to provide you the closing disclosure. The closing disclosure lists the costs you are expected to pay as part of the transaction and includes the escrow fees and how they are split, title fees, loan fees, transfer fees, etc. It is important to compare this to your original pre-approval estimate and identify if your lender has dropped in any additional fees beyond the initial estimate. Also, it is imperative to verify all of your information is spelled correctly and no issues that could cause a delay in your loan paperwork and closing of the transaction.