This article is part of an ongoing series offering guidance on the whole process of buying a house. From daydream to done deal, join Homes & Land on
The Home Buying Journey.
Save time, money and stress by steering clear of common home buying mistakes
There are a lot of factors a homebuyer can’t control — a seller’s actions, the home inspector’s findings, a bank’s decision-making process. But other factors are squarely in your control, and choosing to avoid crucial home buying mistakes can make your life much easier, both now and down the road. Here are a few possible missteps that you might want to sidestep:
1 Failing to get pre-approved for a mortgage
“A critical step in the home-buying process is determining how much house you can afford,” says Scott Kline, a Homes & Land publisher and Florida-based real estate agent who has been in the business for more than 30 years. “Finding your dream home and then discovering you can’t afford it can be disheartening. You can easily prevent this scenario by getting pre-approved for a home loan.”
If you plan to borrow money for a home loan, as most people do, you will need to talk with a loan officer at a lending institution, such as a bank, savings and loan, or credit union. He or she will require proof of your income and your debt through credit cards, student loans, car loans and so on. The loan officer will then arrive at an amount that you qualify to borrow and will be required to pay back in monthly installments. This monthly installment amount should include the actual mortgage payment, which is principal and interest, plus estimated property taxes and home insurance — what’s known as PITI. (If your lender does not include tax and insurance costs as part of the estimate, request an estimate of those costs for your caculations.) Only you know whether you think the amount suggested is reasonable or high based on your spending habits.
A monthly mortgage payment is only part of the expense of buying a house. There is also the down payment, which is conventionally at least 20 percent but might be as low as 3 percent. Some special programs, such as federally sponsored VA and USDA loans, require zero percent down, but most homebuyers will need to bring money to the table. There also will be one-time closing costs. For a buyer those can include:
- A loan origination fee, which lenders charge for processing the loan paperwork for you.
- Attorney’s fees
- Charges for any inspection required or requested by the lender or you
- Discount points, which are fees you pay in exchange for a lower interest rate
- Appraisal fee, which confirms the property is worth at least the price you are paying
- Survey fee, which covers the cost of verifying property lines
- Title insurance, which protects the lender in case the title has liens against it or other problems
- A fee for your credit report
Pre-Qualified vs. Pre-Approved
There is a difference between being pre-qualified and being pre-approved for a mortgage loan.
Pre-qualified means that you’ve told a lender your income level and your credit information, and the lender has estimated what you can afford.
Pre-approved means that the lender has pulled your credit report, checked your debt-to-income ratio, and run a more in-depth analysis of your financial situation. The result is an official pre-approval letter that may help strengthen negotiations with a seller.
2 Not knowing your credit score
If you are even toying with the idea of buying a home, check your credit scores. Credit scores range from 300 (poor) to 850 (excellent). A credit score of at least 620 is required for a conventional home loan. As a general rule, the higher your credit score, the lower the interest rate you can get, though other factors, such as the down payment amount are also used when determining interest rates. Credit scores are calculated from five factors:
- Payment history. Approximately 35 percent of your credit score is determined by payment history. The more bills you have paid on time, the better your score. If you’ve consistently made payments well after the due date, your score may not be high enough to qualify for the best lending rate or, in some cases, for a home loan at all. However, if you missed a car payment once four years ago, don’t fret. Small mishaps, especially when they aren’t recent, are unlikely to derail your score.
- Amounts owed. About 30 percent of your score is determined by the amount you currently owe compared to how much a lender has approved you to borrow. If you have maxed out your credit cards, you will have lower scores.
- Length of time you have had credit. About 15 percent of your score is affected by how long you have been managing credit. The longer you have had a credit history to follow, the better. If you have never borrowed money and do not have a credit history, you may not qualify for a home loan.
- New credit. About 10 percent of your score is determined by receiving new credit applications. Buyers who open up a lot of new credit at once may hurt their scores.
- Type of credit. About 10 percent of your score is determined by the type of credit you have. A variety of credit types accumulated over time tend to boost credit scores, such as installment loans, credit cards and retail accounts.
If you discover your credit score is less than ideal, start working to raise it. Take a close look at your credit history and, if there are errors, contact the reporting lenders and ask for corrections. Pay down credit card balances to no more than 30 percent of the maximum credit line offered. These steps can raise your score significantly.
3 Buying a car while in the process of buying a house
“A common home-buying mistake is getting a contract on a house, then going out and purchasing a new car to go in the home’s shiny new garage,” says Bill Scott, Senior Vice President with Reichardht Real Estate Affilliates. “The car expense knocks them out of the mortgage range they originally qualified for.”
A big purchase eats a significant portion of your total available credit, Scott explains, which means you may no longer qualify for the mortgage amount for which you were originally approved. And any time you open new credit accounts, such as for an auto loan or other big-ticket items, your credit score may drop. If your score drops below a certain number, you may no longer qualify for the best lending rates. Being pre-approved for a mortgage will not prevent this from happening, as most lenders will check your score and your credit worthiness one final time before your loan closes.
4 Skipping or skimping on the home inspection
A home inspection can uncover problems with the foundation, electrical lines, plumbing, roof, insulation, and/or heating and air conditioning systems. In some cases, inspectors may also check for evidence of mold, radon or pests, such as termites. It may be tempting to skip paying for an inspection (inspections typically cost a few hundred dollars), but that can lead to disaster. The potential cost of significant findings by an inspector will likely far exceed the cost of inspection.
5 Failing to hire an attorney
One of the best defenses against making an expensive purchase you will later regret is hiring a real estate attorney, even if an attorney is not required in your area. An attorney’s objective advice can be invaluable. Nearly everyone else involved in a real estate transaction — the seller, the real estate agents and the mortgage broker — has a vested interest in completing the sale because they are paid when the deal is done. An attorney, on the other hand, generally charges a flat fee for a real estate transaction. (Ask upfront how much the service will cost.) He or she has no vested interest in making the deal and can save you from signing an agreement that is not in your best interest.
6 Not requesting contingencies
When signing a sales contract, buyers typically have to put down “earnest money,” which may be anywhere from 1 to 3 percent of the cost of the home. Earnest money is a way of assuring the seller you’re a committed buyer, so they can be comfortable with taking their house off of the market while they wait for your loan to close. At closing, the earnest money can be used to help fund your down payment or closing costs. If you pull out of the deal, you do not get this earnest money back unless you spell out contingencies in the contract that would allow your release from the deal. Sellers hope to limit the grounds for cancelling, and inexperienced buyers may sign contracts that don’t include common exceptions. Common contingencies that should be covered in your contract include:
- Problems uncovered during the home inspection
- Failure to secure financing
- Failure of the house to appraise for the selling price
If the seller resists including contingencies, you are likely better off pulling away from the deal.
7 Underestimating insurance costs and required coverage
Home insurance may not be what you expect. In some cases, what you think should be covered isn’t, so read your policy carefully. Standard policies typically cover theft, wind damage, fire damage, lightning damage, hail damage and damage due to an explosion such as from a leaky gas line. Flooding and earthquake damage are not typically covered in a standard policy, so you may need a special rider or an additional policy for such events. In fact, a lender may require these coverages, which can be quite costly in locations subject to damaging occurrences such flooding, earthquakes or hurricanes. Know what you’re getting into.