7 Things you Should Never Do Before Buying a House
Here are some of the most common mistakes first-time home buyers make, why they matter, and how to avoid them.
1. Don’t finance a car or another big item before buying
One of the biggest mistake buyers can make is to finance a car just before applying for a mortgage loan. Equally troublesome is when buyers wish to go out and purchase new furniture and appliances on credit before their new mortgage closes.
All of these activities are a big no-no, as lenders will do a final credit inquiry check before closing and if new debts were added since you applied for a loan, it could jeopardize the loan approval.
And it’s not just your FICO score that’s at risk. Taking out a loan on a car or financing a big-ticket item like a boat, wedding, or vacation can increase your debt-to-income ratio (DTI), making you look like a less attractive borrower to a lender.
To conclude, avoid making any big purchases or financing a new car for six months or a year before you want to purchase a home.
2. Don’t max out credit card debt
Maxing out a credit card is one of the worst things you can do before closing on a home loan. The extra debt payment amount will offset your income and result in you qualifying for less mortgage financing. It will also lower your credit score, which could increase the cost of your loan.
What lenders care about is how much you owe relative to your credit limits. For instance, if you owe $2,000 and your limit on the card is $2,500, your card is nearly maxed out and it will lead to drastically reduced credit scores resulting in higher rates and monthly payments when it comes to getting a loan to purchase a real estate property.
For the best mortgage rate and in the interest of keeping debt levels down, try to keep your credit utilization below 30% of your total credit limit. For instance, if your credit card allows up to $3,000, try to maintain a balance below $900. And pay the card off in full every month, if you can. This will improve your credit score, reduce your debts, and help you qualify for the best possible home loan.
3. Don’t quit your job or change careers before buying
Demonstrating consistent employment is essential when applying and getting approved for a mortgage loan. Job changes can create lending issues, especially if your pay structure changes from salary to commission, as this necessitates a longer track record of earnings. A change from salary to hourly can also create some lending headaches, as hourly earners can have variations in their income simply based on how much they work.
What is the rule of thumb? Aim for a consistent employment history of two years or more at the same employer or at least in the same line of work. If you already work in accounting, for example, switching from one accounting firm to another shortly before you buy a home won’t set off any red flags for your lender. But if you switch to a totally new field for example, from accounting to hairdressing, you’ll likely need to work a full two years in the new industry before you can qualify.
4. Don’t assume you need 20% down
Many first-time buyers assume they need a 20% down payment to buy a house. But while having 20% down comes with perks like avoiding private mortgage insurance (PMI), it’s not always the best option. Waiting until you have 20% down can push your home buying timeline out by years. And the longer you wait to buy, the higher home prices you’ll be chasing, which likely means you’ll need an even bigger down payment.
Luckily, there are several loan programs available today that require little to no down payment such as the 3.5% down FHA loan or the 5-10% down conventional mortgage.
Typically, you need to pay mortgage insurance if you put less than 20% down. But the good news is that mortgage insurance companies today charge more affordable monthly premiums than they did years ago for borrowers with good credit. As a result, sometimes it makes sense to put less money down and pay off other debts instead of trying to put 20% down on a home just to avoid paying mortgage insurance.
5. Don’t shop for houses without getting preapproved
Before you go house hunting, it’s crucial to get a mortgage preapproval. Otherwise, you could be setting yourself up for disappointment. If a prospective buyer finds a house they love and afterward tries to get preapproved for a loan, the home may be gone before they finish getting preapproved. In addition, many sellers want to show their home to serious buyers only and will request a preapproval letter from the buyer.
There’s another compelling reason to get preapproved early in the process, too: often, you really have no idea how much house you can afford until you get preapproved by a lender.
The preapproval process involves applying with a lender who will check your income, credit history, and assets. Only after verifying these documents can a lender approve you for a home loan and tell you your real price range.
6. Don’t go with the first mortgage lender you talk to
You’re excited to claim a home, and you want to speed up the process. So, you apply with one mortgage lender and move forward as soon as you’ve been approved. The experts agree: That’s a big mistake. Although many lenders’ rates are very close in price to others, some lenders charge rates that are above average. Getting a bad loan with a higher interest rate can be very expensive in the long run, so be sure to shop around and get quotes in writing from several different mortgage lenders. You won’t know who can offer you the best deal until you’ve compared personalized rate quotes from at least 3-5 companies.
7. Don’t make any big financial changes before closing escrow
Once you have a signed purchase agreement and you’re approved for a home loan, you’ll go through the final stages of underwriting. This is mostly a waiting game while the lender re-checks your financials and issues the final approval for your loan before to wire the money to the title company. Therefore, don’t be lulled into thinking it’s a done deal. Nothing is official until you’ve signed the final closing papers. The last thing you want to do while waiting for final loan approval is to make major financial changes, such as: purchasing a car, significantly increasing your credit card balance, opening up new credit cards, changing careers or applying for new loans or lines of credit.
It’s most certainly tempting to open up a Home Depot credit card so that you can save money on new appliances. But this kind of move can easily tip the delicate balance of your DTI and throw off your creditworthiness so that you no longer qualify for the loan you were approved for.
Bear in mind that a loan approval isn’t final until the loan funds, at which time the house will be in your name. But before that time, a lender can rescind the approval if a material change to the buyer’s situation occurs.
As long as you avoid these mistakes during the home buying process and keep your finances in the best shape possible you should be on the right track to homeownership. Simply maintain a financial quiet period prior to closing, and don’t do anything that could put your final approval and your home purchase in jeopardy.
Source: this excellent article was written by Erik J. Martin who is a contributor for Mortgagereports.com, the Reader's Digest, AARP The Magazine, and The Chicago Tribune.