What Not to do before buying a home

Mark Luciani
President – America One Mortgage Corporation
June 29^th, 2022

Are you thinking of buying a new home?  Don’t make one of these common mistakes!

When you are preparing to purchase a new home, maybe your 1^st home, you want the process to be as smooth as possible.  Getting pre-approved and avoiding common mistakes can get you into the home you want and help make it a smooth and fun process.

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Prevent last-minute surprises

You want to avoid the last-minute surprises, or finding out in the middle of your purchase, that you don’t qualify.  Then things turn into one of those home-buying nightmares that we sometimes hear about.  To do that, you want to get pre-approved.

Get Pre-Approved and Avoid the most common mistakes.

If you get pre-approved and avoid the common mistakes listed below, you will likely have a smooth and fun home buying process.  And that is what you want when you are purchasing a home.  It should be a fun and exciting time.  Buying a new home is one of the most significant transactions some of us will make in a lifetime, so try to make it a positive experience.

When buying a home, several different processes are going on, so it’s easy to overlook details or make mistakes.  There are contract negotiations, physical inspections, mortgage financing, the appraisal process, and trying to plan how and when you will move your life from point A to point B.  It’s a lot of distractions and can lead to errors or mistakes.

So, what can you do to try and avoid the problems and pitfalls?

Common mistakes to avoid when you are preparing to purchase a home

1. Get Pre-Approved Before you start shopping for your new Home

Rule #1 is to get pre-approved for your new purchase as step 1.  Always.  If completed correctly with the right mortgage company, this critical first step can eliminate many problems, headaches, stress, or homes lost in escrow due to financing issues.

Read more about why to start with a pre-approval

2. Don’t Finance or Lease a new car or other new debt before buying

One of the biggest mistakes buyers can make is to finance or lease a car just before applying for a mortgage, or worse, afterward, during, or right before their home escrow.

Sometimes just as bad or worse, buyers purchase furniture, boats, RVs, or other toys before purchase.

This new debt can cause your FICO scores to drop (740+ typically qualifies you for the best rates), leading to higher interest rates.  The monthly payments on the new debt can increase your debt ratio beyond program guidelines (typically 36% to 45% depending on the program) and cause the loan to be declined.

3. Know your credit scores

If you obtain your pre-approval before starting your home shopping, you will know your scores, and all should be good.

Some buyers skip or delay that process and find out after they are under contract and making moving plans about some old medical bill, missed payment, or another credit item, that pulled their scores down from a 740 to a 650, and that can cause a significant impact in pricing or loan approval.

Know your credit scores before you go house shopping.  And keep in mind that the credit scores that are showing up on your credit card or bank statements are not the identical FICO scores (or scoring model) that mortgage lenders use for approval.

Obtain a free copy of your credit report directly from the three big bureaus (Equifax, Transunion, Experian) at www.annualcreditreport.com. Once you have it, you can also dispute any information that might be showing up that may not be accurate.

4. Make a budget for your new home expense

It’s no fun being house poor after your move-in, and some buyers make this mistake.  They got into that perfect house in the neighborhood they wanted but spent a little more than they planned.  This often happens in a tight seller’s market when buyers get caught in bidding wars to get the home.

Also, you want to stay aware of interest rates.  Are they moving up or moving down?  That can affect your payment.  Have a budget and plan, so you are not shocked when that first mortgage statement shows up.  Avoid house payment sticker shock.

5. Don’t max out your credit cards

Maxing out your credit cards or pushing balances over 50% of the borrowing power limit can lead to problems before closing.

The increased debt payments can result in you qualifying for a lower mortgage.  Also, higher debt balances can lower your credit scores, leading to higher mortgage rates.  And in turn, higher mortgage rates can result in lower approved loan amounts.

For credit scores, what is more, important than the balance and payment, is how much you owe relative to the credit limits.  If your outstanding balances surpass 30% to 50%, more so if they are nearly maxed at 80% to 100% of available credit, it can cause your scores to drop significantly.

By keeping your balances low and making credit card payments on time, you will improve your credit scores which will help you qualify for the best rates and possible loan amounts.

6. Don’t quit your job or change careers before making your new purchase

Consistent employment is a critical factor in your mortgage approval.

Job changes can create underwriting challenges, especially when using bonuses, overtime, commissions, or self-employment income to help you qualify.  All of these variable income types typically require a 2-year history, so if you make a change and don’t have it, the income may not be used in qualifying, which can cause a problem.

If you are switching companies from one firm to another but keeping the same job type, that is not a problem.  However, if you are changing industries or job types or are trying to use any variable income to help you qualify, that could create issues for your loan approval.  If you are starting a new industry or need commissions or bonuses to help you qualify, you will likely need to work a two-year history before being eligible.

7. Don’t Assume you need to make a 20% down payment

Many would-be buyers assume they need 20% or more for a down payment to buy a house.  However, although a 20% down payment does have its benefits, it is not required and not always the best option.

For many buyers, especially buyers in higher-priced markets, waiting until you have the 20 % down can delay your home purchase by many years.  And the longer you wait, the higher the prices typically move, and the larger the payments and down payments become.

Fortunately, there are many loan programs available that require 0% to 10% down, including:

• 0% down VA Loan (If you are a qualified military member or veteran)
• 0% down USDA Loan (available in select rural and suburban areas)
• 5% down FHA Loans
• 3%-10% down Conventional Programs

Typically, <20% down will require private mortgage insurance (PMI), but not always.  And in today’s mortgage insurance markets, the PMI premiums are less than they were years ago and might be lower than you expect, especially if you have high credit scores.

You certainly would not want to make a minimum down payment, stretch beyond your budgeted expenses, and end up house-poor and miserable in your new home.   Often, it’s a smart financial move to put less money down and use the cash saved on the down payment to pay off other debt (which can increase buying power) or for home improvements before you move into your new home.  Making a 20% down payment to get into a home and then spending a ton of money in credit card debt fixing it up later often does not make sense.

For many buyers, if they could not make their initial home purchase with a minimum down payment loan program, they would never have been able to buy a home in the first place.  And would have never been able to keep chasing the higher prices to purchase the house later.  Minimum down payment loans are an effective tool as long as they are used wisely and responsibly.

8. Don’t make any significant financial changes after you have an accepted offer

Once your offer is accepted and pre-approved, you will still need to go through the final stages of underwriting and closing.

Assuming you were pre-approved, this process primarily updates and final verifies all income, assets, and debts. But don’t make the critical mistake of thinking the loan is finalized before closing.  It is not.  Lenders are responsible to secondary market investors for confirming all information before closing.  If your credit report is older than 60days, there is a good chance this will also be updated before closing.

You want to avoid any of these common changes:

• Purchasing a car
• Spending a lot of money on credit cards
• Opening new credit cards accounts or closing others
• Changing jobs or careers
• Applying for new loans or credit or Cosigning for others

It can be tempting to use extra funds for other projects needed, make new purchases, spend money on credit cards or purchase a new car.  But never do this without reviewing the changes with your mortgage consultant.  Even co-signing for a son or daughter can cause qualifying issues at closing.

Remember that the loan is not finalized until the loan is funded and closed, and don’t do anything that can jeopardize your approval and your new home.

Recap and Take-Aways:

1. Get Pre-Approved Before you start shopping for your new Home
2. Don’t Finance or Lease a new car or other new debt before buying
3. Know your credit scores
4. Make a budget for your new home expense
5. Don’t max out your credit cards
6. Don’t quit your job or change careers before making your new purchase
7. Don’t Assume you need to make a 20% down payment
8. Don’t make any significant financial changes after you have an accepted offer