I have to say, this is not only for first-time homebuyers, also goes to all people who are trying to purchase a property. Please pay attention to all the following points, these are the common mistakes that could be avoided when you are thinking to purchase real estate.
- Didn’t get a pre-approval letter before looking for a home
- Only talk to one lender
- Looking for a house that is out of your budget
- Spend all your saving to buy a house
- Didn’t watch closely your credit score
- Assuming you need to put a 20% downpayment
- forget about the hidden costs of owning a house
Looking for houses before having a pre-approval letter
This is a common mistake. When we think about buying a house, the first thing we do is start looking at houses. go to open houses, talk to real estate agents in the open house, fall in love with houses, and then realize, they all ask for the same thing: Do you have a pre-approval letter from your lender?
Unless, you are trying to buy with cash on hand, otherwise, you should start taking to lenders and get a pre-approval letter from them.
Sellers are looking for serious buyers and the one has a higher chance and less stress to get the loan approved and close the deal. The seller won’t want to take the chance on someone who is not sure if they could qualify for a loan or a certain amount of a loan.
For you to be able to place an offer once you find your dream house, and have a higher chance to get the officer accepted, please find and talk to lenders, they will go through your financial, income, and credit report, and calculate how much is your affordability, So you know what is your maximum purchase limits.
Make sure the lender gives you a “ fully underwritten preapproval letter”. FULLY UNDERWRITTEN PREAPPROVAL, this means your credit and finances pass the underwriting system, if none of the conditions changes, you have no problem getting a loan.
Later, I will talk more about how to increase your chance to get your offer accepted.
Only go to one lender or bank
Most of the buyers often talk to one lender or bank, and get the loan from them directly, this is not wrong but it’s a big mistake. You should talk to several lenders and banks to compare their offers, not only in terms of interest rate but also in closing costs and other fees.
One tip, you can take the offer from one lender or bank and ask the other one if they could match and maybe improve.
Please shop around and talk to at least three different lenders, when we talk about lenders, it includes all different kinds of lenders, such as banks, credit unions, mortgage companies, and mortgage brokers. Get their rate quotes ( be aware rates change regularly, even same day), and check the lender fees and loan terms. Get to know how they work, and if they answer all your questions and concerns. You need to feel comfortable with your lender/loan officer.
Wanting houses that are out of your budget
You need to stay within your budget and find a house that you won’t feel a burden on after purchasing it. Don’t overextend yourself when you buy a house.
Focus on the monthly payment you can afford instead of the loan amount you could get from the lender, this way you have a better idea of how much room you have after the monthly mortgage payment, how much you can pay other bills and expenses, or still have some money to fund to a retirement account, a child’s education fund or go on a vacation.
Don’t max out your qualification loan amount, if you qualify for $800.000, try not to buy up to the maximum amount. It’s also very important to be honest with your lender about your finance, you are the one who is repaying the loan, and you should still be comfortable financially after buying a house.
Spend all your saving to buy a house
This is the most common error for first-time homebuyers, which is to spend almost all your savings on down payment and closing costs.
A lot of homebuyers in order to avoid paying the mortgage insurance, try to use all their saving to match the 20% of downpayment. But the cons of this are that even if you are saving on the mortgage insurance, you also do not have any reserve left.
After buying the house, you should still have an emergency fund, between three to six months of living expenses.
Mortgage insurance is not a good idea, you may see it as extra money going away, but not having any emergency fund, seems to be riskier than mortgage insurance which will go away after reaching 20% of the loan amount.
Didn’t watch out for your credit score
When you are getting your preapproval letter, the lender will pull your credit report, check everything they need to check, and give you a pre-approval letter. But what homebuyer doesn’t know is, they will pull the credit report again just before closing. The reason is they want to make sure that nothing has changed during this period.
This means anything changes in your credit report can affect your loan application process, and the worst scenario is not being able to close the loan.
From pre-approval to closing, please keep your finances intact. Don’t apply for new credit cards, don’t close any account, don’t buy or lease a car, don’t make large purchases, and don’t withdraw any money from your banking account.
Even months before applying for a loan, avoid large withdrawal or deposit amount movements in your banking accounts. If you use a lot of credit cards, double-check your credit limit, your existing balances should be lower than 30% of your available credit limit. And the most important thing is always to pay your bills on time and full amount.
Waiting to have a 20% downpayment to buy
Lots of people still believe that you must have a 20% down payment in order to buy a house. Of course, with a 20% down payment, you can avoid paying mortgage insurance, but it doesn’t mean you can’t buy a house if you don’t have a 20% downpayment.
Saving up 20% of the downpayment, for some people could take years, and in the meantime, you may still have to pay the rent, instead of paying your house mortgage and accumulating your house equity.
When your goal is buying a house, and you have already saved some money, please contact your lender or loan officer to explore your options. There are many different loan options and programs to choose from and you might be qualified for a loan.
If the monthly mortgage payment is similar to what you are paying for rent right now, buying a house may be a dream that will become true sooner than you think.
Didn’t have a cushion for extra expenses
For first-time homebuyers, there are many hidden costs that you don’t know about until they start to show up. Most people underestimate the cost of the maintenance and repairs because these are not shown on the loan estimate.
To avoid any surprises and put you in the red financially. Remember to set aside some money monthly to pay all these extra expenses such as repairs or maintenance when it’s needed. The rule of thumb is 1% of your house purchase price as an annual maintenance budget, this may seem too much since lastly the house price went up a lot, but remember the repair and material costs also went up. Better be prepared. Better be prepared than sorry.
Conclusion: Plan ahead
Buying a house is a big financial commitment, maybe one of the biggest investments in our life. The better you prepare yourself, the better result you will get. Plan ahead. If you are thinking to buy a house, you should talk to a lender or loan officer right now, and be honest with your financial situation. I am a loan officer who works as a mortgage broker, we have access to lots of loan programs and products. According to your financial situation, we can offer you the best loan program that suits you the best. If there is something we can work on and get a better loan term, we will work with you to achieve your home purchasing dream.
Maybe increasing your credit score can get you a better interest rate. Maybe saving up a little bit more money in downpayment can put you in a better loan program. Maybe by paying off some debts, you can apply for a higher loan amount. There are many things we can do to prepare you to apply for a loan and buy your dream house.
Try to avoid all these mistakes I talked about before, hope you have a smooth house-buying journey. If you have any questions or comments, please go to the “contact me” page and leave me a message. I will get back to you as soon as possible.
Thank you for visiting. See you next post!