If you're like most people, buying a home is the biggest investment you'll ever make. Hardly any other investment gives you the return of investment than owning your own home. When considering buying a home, be aware that the amount you wish to borrow should be between 25 to 40% of your combined gross annual income. This figure should also take into consideration such expenses as taxes and home insurance. If you take the home buying process step-by-step, it can also be the most rewarding. Imagine: turning the key to your very own home!
As is anything else, be sure to do your own due diligence when considering a home mortgage loan. The type of house you can afford obviously depends on several factors, including your income, your monthly expenses, your credit score, the current interest rate, and how much you've put in as your down payment. Make sure to do your research and calculate your mortgage payment options. This area is where you must take time to become aware of different situations. Talk to Realtors, home mortgage experts, and to family and friends before making your final decision.
Here are 10 mistakes people make when planning to buy a new or existing home:
1. Seeking a Loan without Pre-qualification
Not being pre-approved prior to shopping for a home is the number one cause of headaches and delayed closings. When shopping for a loan you have two options; to get a pre-approval or to simply pre-qualify. Pre-approval and pre-qualification are two different things. During the pre-qualification process, a loan officer asks you a few questions and provides you a "pre-qual" letter in good faith, based on the unverified information you provided. This pre-qualification is 100% contingent on the information you provided being accurate; and is therefore unreliable as a true measure of your borrowing capability. The pre-approval process is much more thorough.
The pre-qualification process is conducted by a mortgage broker or institution to determine if you are financially capable of buying a home. Things such as gross annual income, credit history, debt to income ratio, and ability to pay are examined. You will be given a letter of pre-qualification at the end of this process. Pre-qualification determines the size of the loan you are capable of paying.
The seller knows you can close the transaction because a lender has carefully reviewed your income, assets, credit and other relevant information. In some cases (multiple offers, for example), being pre-approved can make the difference between buying and not buying a home. Some sellers - who may otherwise hold out for a better offer - will take a lower offer if they know the buyer can close on the property quickly. Additionally, if you are shopping for bank owned property or a property in short sale; the current mortgage holder will only discuss a sale of the home with pre-approved borrowers.
After it has been determined that you are pre-qualified, a pre-approval process is the next step. Here, the financial institution will determine if you qualify for the amount you wish to borrow. The mortgage company handles all the paperwork. No property has yet been identified.
2. Buying a Home without Formal Inspections
Unless you're buying a new home with warranties on most equipment, it is highly recommended that you get property, roof and termite inspections. Don't take the word of the seller that certain repairs and maintenance has been made to the home. A formal inspection of wiring, plumbing, and general structure of the home is needed to avoid nasty surprises. If buying a home in the country, always get a well and septic inspection. It is common practice for the seller to pay for the well inspection, and to have the septic tank pumped. In a new construction, warranties should be in place to cover these issues.
Inspection reports are great negotiating tools when it comes to asking the seller to make repairs. If a professional home inspector cites specific repairs in the inspection report the seller is more likely to agree to them than if you simply try to negotiate based on your observations. As we mentioned above, make sure that any last minute items that arise based on the inspection report or your own visual inspection during the walk through are addressed in writing and completed before you take ownership of the property. If the seller agrees to make repairs, have your inspector verify the work is completed properly prior to close of escrow. Do not assume that everything will be done as promised.
3. Using a Dual Agent
A dual agent is a Realtor that represents both the buyer and seller. This can create an obvious conflict of interest, because the realtor will naturally negotiate harder for the seller. Their commission is based on the selling price, and it only makes good sense for them to work harder for the seller than the buyer. If you are a buyer, it is usually better to have your own agent represent you. The only time you should consider using a dual agent, is when you can get a price break (usually resulting from the dual agent lowering their commission). In that case, proceed cautiously and do your homework!
4. Choosing a Lender Just Because They Have the Lowest Rates
While ensuring that you are receiving a good deal on your loan is a top priority for all savvy home shoppers; it is important to remember that a good deal does not always mean best interest rate. Your loan's interest rate is calculated by a wide variety of factors but is factored in part by the closing costs that you pay in coordination with receiving the loan. There are two types of points that can be charged on a loan; discount points and origination points. A point is equal to 1% of your loan amount; so if the word point throws you off just think percent. A discount point is a charge that you pay to the lender to lower your interest rate. An origination point is their fee for service.
Although a lender may have lower interest rates than other lenders, be sure that you get all costs, fees, and points listed up front. Be aware of the APR, loan and closing fees, and other charges. Be aware of the points system. Some lenders will only disclose discount points. Be aware of origination points and fractions thereof. An origination point is basically a fee paid to the lender to compensate them for the evaluation, processing and approving home mortgages.
Within 3 working days after receipt of your completed loan application, your mortgage company is required to provide you with a written good-faith estimate (GFE) of closing costs. You may also want to consider requesting a GFE from a few lenders before submitting your application. With a few GFEs to compare, you can get a feel for which lenders are more thorough; and you can educate yourself regarding the costs associated with your transaction. The GFE with the highest costs may not indicate that a particular lender is more expensive than another--in fact, they may be more diligent in itemizing all fees.
5. Choosing a Lender on the Advice of Your Realtor
There are countless stories of consumers who ended up paying higher rates, or got a loan that wasn't right for them, because they blindly followed their Realtor's advice. Your Realtor is trained in selling homes, not in financial decisions. Although they may be familiar with the market and different lenders in the area, remember that they only get a commission when the deal is closed. Therefore, your realtor may steer you to a lender that may not have your best interests in mind. Always shop around for the best mortgage lender. Comparing rates and fees over three different institutions is only in your best interest.
6. Using Verbal Agreements
Don't set yourself up for surprises when you move into that new home and all the appliances are gone. There are many details that make up the purchase contract that governs the particulars of your home purchase. It is not unusual for an item to be missed; especially those requests made by you of the seller or sellers agent. If you ask for a toilet to be repaired or a chipped tile to be repaired don't simply take someones word that the item will be repaired prior to transfer of the property. Make sure every item that you agree on is put in the purchase contract.
Oral agreements are hard to prove and even harder to enforce. They can lead to an ugly situation. Once the property transfers to your name; problems or issues that you thought were going to be repaired are now your responsibility. Don't let miscommunication or failed promises ruin the purchase of your dream home. Get all commitments - no matter how small - in writing.
7. Not Getting a Rate Lock in Writing
The mortgage company will notify you when they have locked in your rate of interest. When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and other particulars about the program. This information is readily available via a Rate Lock Commitment. Request a copy of the lock for your records.
Many lenders who are not used to conducting purchase transactions may select a lock period that isn't suitable for your home purchase plans. This is because locking for longer periods of time increases the interest rate, because lenders need to protect themselves from upward changes in interest rate once they've committed to a long-term lock. Make sure you understand how long your commitment is for prior to selecting a lender. An unsavory lender can quote a rate on a short lock period (such as 12 days) to quote a low rate; but may not be able to deliver that interest rate in 60 days when you need it to close escrow.
8. Signing Documents without Reading Them
Do not sign documents in a hurry. As soon as possible, review the documents you'll be signing at close of escrow--including a copy of all loan documents. This way, you can review them and get your questions answered in a timely manner. Do not expect to read all the documents during the closing. You will feel pressure to complete them quickly due to the presence of a notary and your Realtor. Make sure you fully understand the mortgage and purchase documents you are signing. Be on particular look out for items such as prepayment penalties, ARM riders and the final Good Faith Estimate. Bring a copy of your original GFE with you to the signing table so you can compare closing costs and ensure that you are receiving the same deal you originally negotiated.
9. Not Shopping for Home Insurance in Advance of Closing
Start shopping for insurance as soon as you have an accepted offer. This gives you the opportunity to shop around and get the best deal. Many buyers forget about the need for home owner's insurance until the last minute. This leaves them little time to compare quotes and rates from insurance companies. Home owner's insurance is an expense that you will have for the duration of your home ownership. Remember, the property must be insured at time of closing. Prioritize the acquisition of insurance in order to find the best deal for your property. Like mortgage lenders, insurance companies specialize in different properties and products; by shopping around you can guarantee yourself a complete policy at a fair rate.
10. Not Having All Arrangements in Place to Move upon Closing
You expect to move out of your current residence on Friday and into your new residence over the weekend. Also on Friday, your lease terminates and the movers are scheduled to appear. Friday morning arrives: bags packed, boxes stacked, children under arm and the dog on a leash; you're sitting on your front door stoop awaiting the arrival of the movers. Your phone rings. Your loan closing is delayed until the following Tuesday. The new tenants turn into your driveway with a weighted-down U-Haul and the movers pull up across the street. You ask yourself, "Where's the nearest Motel 6 and storage facility? How much will the movers charge for an extra trip? Can we afford it?"
How can you avoid such a disaster? Cancel your lease and ask the movers to show up five to seven days after you anticipate closing your transaction. Consider the extra expense an insurance policy. You're buying peace of mind--and protecting yourself from expensive delays.