The mistakes homebuyers are making every day are usually minor, and rarely do lasting harm. But there are potential pitfalls that are more serious and could turn out be costly. Here's a heads-up that might help you avoid some of the worst.
1. Not Planning Ahead
Just as you'd train for a major sporting event such as a marathon, you need to get into great financial shape for what may be the most important transaction you ever make. And, as you would for a race, you need to begin many months before the big day – the one on which you make your mortgage application. There are three overlapping aspects to your fitness regime:
- Get your credit score up – Request a copy of your credit report (you're legally entitled to a free one annually) from https://www.annualcreditreport.com/index.action and check it for errors as soon as it arrives. Errors are amazingly common, and can take a long time to get fixed. Also, find out your credit score and begin to monitor and manage it. LendingTree has an entirely free service that can help you do that.
- Reduce your credit card debt as much as you can – If at all possible, you certainly want your balances to be less than 30 percent of your credit limits, but the lower the better. That will drive up your credit score.
- Hold off on opening new accounts – Your debt-to-income ratio is one of the most important considerations for lenders when they work out whether to lend to you, how much and at what mortgage rate. Significantly adding to your indebtedness in the months before you make your application is going to cost you, so wait until after closing for that new car, credit card or personal loan. Additionally, your credit score invariably takes a small hit whenever you open a new credit account. Providing that account is subsequently managed well, the hit shouldn't last longer than a few months. But even a small ding can move you from one credit category to a worse one with a worse rate, and that can prove very expensive over a 30-year loan.
2. Not Shopping Around for the Best Mortgage
Once your debt's as low as you can get it and your credit score is as high as possible, you need to find the very best mortgage rate possible. This isn't optional. Paying even a slightly higher rate than necessary can cost you serious money when you're borrowing very large sums over a very long time.
And yet many people don't seek out the best deals. In 2015, financial regulator the Consumer Financial Protection Board (CFPB) published a study that found that 47 percent of homebuyers considered only one lender or broker! Given the sums involved, it's unsurprising the CFPB concluded, "We believe that mortgage borrowers should be shopping around."
Just because you find your lender online doesn't mean you can't engage with it fully. By all means, call, get to know and talk at length with loan officers before and after you commit. You can find lenders with reputations for being helpful and responsive through the LendingTree Lender Ratings page, where other borrowers share their experiences.
3. Not Getting Pre-Approved
Especially if you're a first-time buyer or are purchasing in an area where demand for property is high, you'll likely benefit if you get pre-approved for your mortgage before you begin your home search.
This involves getting a letter from a lender that confirms it's checked your finances and is willing in principle to lend to you. It will help ensure both real estate agents and sellers take you very seriously. Learn more at Start Searching For Your New Home With A Mortgage Pre-Approval.
4. Not Thinking About the Future
Money may severely limit your options, but if you can afford to think ahead, you stand to save yourself the cost and stress of having to move again sooner than you'd like. For example, if you plan on having a family one day, you might want to take school districts into account when choosing your new home. If you think health issues might force your parents or in-laws to move in with you some day, you might want to have a yard with space to build an annex.
Or, if you're coming up to retirement, you may want to avoid large yards and steep inclines that could become a burden as you get older. And you should probably consider how close your nearest medical facilities are going to be.
Regardless of your circumstances, you need to think about resale value. A home may be perfect for you, but will it appeal to a large pool of buyers when you come to sell it? If it won't, you must either bite the bullet and be prepared to suffer a loss or lower profit down the road, or find somewhere else.
5. Ignoring Latin
Caveat emptor means "let the buyer beware" in Latin. And, although there are regulations and legislation surrounding home purchases, they're far from comprehensive and you'd be wise to be wary. Some common errors buyers make include failing to:
- Use a reputable real estate agent or realtor – A good one can save you a whole lot of time and stress, answer questions and help you navigate the legal process. Choose one carefully, and he or she can be invaluable.
- Read the sales contract before signing – Make sure it includes all the usual exclusions, including being free to walk away if major defects are uncovered or you can't get the necessary financing. Otherwise, your "earnest money" down payment may be at risk.
- Commission a home inspection – Unless you're an expert in building construction, you'll probably want professional reassurance that the property you're buying is free of serious defects.
- Read title documents – Your title insurance should protect you from relevant undeclared issues. But if the seller declared an existing right in your documentation, you're on your own if someone else subsequently exercises that right over your property. So find and read those declarations.
- Check out your new neighborhood properly – Visit the home at different times of day, and chat to those in neighboring homes about what it's like to live there.
- Retain an attorney – In some areas, it's normal practise for purchasers not to have their own attorney. That's fine nearly all the time, but some experts suggest it's worth the expense of having the additional protection provided by having a specialist real estate lawyer who's wholly on your side. It's up to you.
That list may sound scary, but remember that the vast majority of property transactions are trouble-free (though not hassle-free), and the mistakes homebuyers are making daily rarely have serious consequences. However, because of the size of the transaction and the emotional bond people forge with their homes, the relatively few cases in which serious problems do arise can be traumatic and financially damaging. So it's worth taking sensible steps to protect yourself.