Common Mistakes Home Buyers Make During the Mortgage Process
The home loan process can be daunting — especially if you’re a first-time home buyer who doesn’t know what to expect. Fear no more. We took some time to discuss common home buying mistakes that happen throughout the mortgage process, to better prepare you for what not to do.
1. Failing to check credit scores in advance
Your credit score represents your overall credit history, and lenders consider it as a key indicator of how likely you are to repay your mortgage. So, the higher your score, the better interest rate you’ll receive simply because you’re considered a more trustworthy borrower. This can save you thousands of dollars in interest over the life of your loan.
Before starting the mortgage application process, be sure your credit score is healthy. To accomplish this, lower your debt, make (debt) payments on time, and limit your credit applications. And of course, check your credit score. It’s something you can do for free without affecting your credit.
Curious how credit scores affect interest rates? Learn the basics and save a ton in the long run!
2. Starting the home loan process too late
An American Financing sales manager says, “One of the most common home buying mistakes is that people tend to start the process backward. We always suggest getting financing approved before the home search. This allows us to assess your needs and get you quickly pre-approved. Every now and then, customers call in and say that they want to put an offer in on a home, but are not approved. While it’s perfectly acceptable to find a home first, there’s only so much we can do in a short time before another buyer — with pre-approval — comes in and gets their offer accepted. This is especially true in hot, seller’s markets like Denver. That’s why we always recommend getting approval going 30-60 days prior to shopping.”
Let’s consider the stumble across your dream home scenario. Say you’re passively searching for homes and surprisingly come across everything you’ve always wanted and more. Talk about a piqued interest level. The price point seems reasonable, so you begin actively researching mortgage lenders to see where you can find the best rate, hopefully in the shortest amount of time. Only now you find out, your spouse’s less than perfect credit, or your rather high debt-to-income (DTI) ratio are limiting the amount to which you qualify. It can be heartbreaking. Avoid it altogether and learn upfront what you can afford.
Not ready to start the home loan process? Consult a home affordability calculator.
3. Opening or closing lines of credit
Once you receive mortgage pre-approval or have an offer accepted, you may think it’s time to start shopping for new home decor. Do so in moderation. You don’t want to fall into the trap of signing up for a new credit card to cover these expenses. By opening a new line of credit prior to funding your mortgage, your credit score takes a hit, even if you don’t end up using the card.
Let’s say you end up using the card, and you charge hundreds or even thousands on it. You’ve now increased your debt, which affects your DTI. If you’re DTI is too high, you risk losing mortgage approval.
4. Not saving enough for down payment
There are a lot of affordable loan programs that require 10%, even 3.5% down payment. Still, on a $300,000 house, that can cost over $10,000 (and does not include any mortgage origination fees or closing costs). Even with help from down payment assistance grants, home buyers still need some money down.
Let’s not forget: the more you can put down, the less likely your chances are of having to pay monthly mortgage insurance. And, the less you put down, the higher your monthly payment. You’ll want to strongly consider your financial situation and talk it through with an advisor or mortgage consultant before falling in love with a home that’s out of your budget.
5. Focusing too much on the rate
An American Financing sales manager says “a lot of home buyers — and even homeowners looking to refinance — spend too much time concentrating on the rate without regard to anything else. Don't be driven by interest rates. In a lot of cases, a lower principal balance with fewer fees has a lower payment than a lower rate with higher fees.”
Not to mention the fact that interest rates generally don’t move much. The right property comes along rarely enough that overemphasizing rates can cost you — especially now, where home prices continue to rise around the country.
To put things in perspective, rate increases raise monthly mortgage payments but not as much as home buyers expect. A quarter-point change isn’t likely to alter the monthly payment on your mortgage by more than $20-$30, at the most. For example: on a $200,000 home with a 30-year mortgage, the expected increase of a quarter of a point translates to paying roughly $30 more per month.
6. Buying more house than necessary
Another common home buying mistake is falling in love with a house you can barely afford. An American Financing mortgage consultant says that “buyers find the most long-term success when figuring out what they can afford, how much they can put into a down payment, and then sticking to the plan. Creating a budget and determining a comfortable monthly payment is key.”
Just because you are approved for a higher loan amount does not mean you have to overextend yourself.
Live within your means, and you'll be better prepared to avoid financial losses. If something were to happen and you needed to quickly sell or rent the property — remember, markets change. If you bought the largest home in the neighborhood, that might not help when it comes to selling.
Buying a home is likely the biggest purchase you’ll make. A good rule of thumb is to spend 28 percent of gross income on housing.
7. Underestimating the added costs of homeownership
Don’t become house poor by purchasing too much home. You’re going to experience utility bills, potential issues (like a water heater or roof replacement), and even home furnishing costs. According to a recent report shared by Zillow and Thumbtack, small overlooked home expenses can cost homeowners an average of $9,080 a year.
Quick tip: Prevent issues by following a home maintenance checklist.
Take your time to prepare before committing to a home investment. Always remember you have options. Options in mortgage lenders, properties, realtors, and loan programs. When you’re ready to experience the journey toward homeownership, choose to work with a company that has your best interests in mind and is focused on your schedule. Be sure to ask the right questions before buying a home, and of course, enjoy the experience!