Set yourself up for home buying success
In today’s ultra-competitive housing market, buyers need to be strategic to get the home they want.
Luckily, there are some simple best practices you can follow when house hunting and applying for a mortgage that will put you on the road to success.
If you know what to expect — and how to avoid common home buying mistakes — you can give yourself the best possible shot at scoring the home you want. Here’s what to do.
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Mistakes can cost you when buying a house
When you’re preparing to get a mortgage and buy a new home, it’s important to clean up your personal finances and present yourself as a strong borrowing candidate.
However, that doesn’t just mean saving up cash for a down payment and closing costs.
It also means avoiding common financial mistakes that can reduce your borrowing power — or even, in a worst-case scenario, get you denied for a mortgage.
“Most buyers are so preoccupied with simply saving up for a down payment and getting their foot in the door that they forget about the little details that can trip you up — such as a low credit score and paying down their debt,” says Michele Harrington, COO of First Team Real Estate.
Don’t get so caught up in saving and house hunting that you forget about other details that impact your mortgage.
Khari Washington, broker and owner of 1st United Realty & Mortgage, agrees.
“It’s easy for a home buyer to make mistakes during this process because this transaction is one of the most expensive things a person will engage in during their lifetime,” says Washington.
“Buying a home entails a lot of different activities going on at the same time. There are house condition issues, mortgage financing issues, contract negotiation issues, and appraisal issues that can all cause problems, distract you, and lead to errors in judgment if you are not careful,” he cautions.
So, what do you need to look out for? And how can you set yourself up for success?
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
Jim Roberts, president of True North Mortgage, says 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,” he explains.
“All of these activities are a big no-no, as lenders will do a final credit inquiry check before closing; if new debts were added, 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.
“If your DTI is above a certain threshold — typically around 43% — then you are considered a risky borrower,” Harrington cautions. “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,” Washington says. “It will also lower your credit score, which could increase the cost of your loan.”
Roberts notes that, in the credit scoring system, the actual debt amount doesn’t matter — you could owe $2,000 or $20,000.
“What they care about is how much you owe relative to your credit limits,” says Roberts.
“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,” he explains.
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 assume you need 20% down
Many first-time buyers assume they need a 20 percent down payment to buy a house. But while having 20 percent down comes with perks — like avoiding private mortgage insurance (PMI) — it’s not always the best option.
Waiting until you have 20 percent 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. These include:
- A 0% down VA loan (available to qualified military/veteran borrowers)
- A 0% down USDA loan (available in select rural and suburban areas)
- A 3.5% down FHA loan
- A 5-10% down conventional mortgage
“Also, some conventional loans can require as little as 3% down if you pay mortgage insurance,” Washington points out.
Typically, you need to pay mortgage insurance if you put less than 20 percent 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.
“A lot of times it makes sense to put less money down and pay off other debts instead of trying to put 20 percent down on a home just to avoid paying mortgage insurance,” Roberts says.
4. 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 — typically two years when it comes to commissions,” Roberts adds.
“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,” he explains.
Roberts’ 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.
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,” says Washington.
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,” Harrington says.
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,” Washington recommends.
One of the biggest fallacies among borrowers is that their longtime bank will provide the best deal for them.
“Typically, big banks are significantly more expensive in both interest rate and closing costs than a good mortgage broker or other lender,” cautions Roberts.
So, when you’re getting quotes, try checking with a few different types of lenders. Check rates at your current bank, but also look at online mortgage lenders, credit unions, and maybe even a mortgage broker.
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
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 final approval. But 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
- Applying for new loans or lines of credit
“It’s tempting to use any extra funds you have to buy thousands of dollars worth of furniture or open up a Home Depot credit card so that you can save money on new appliances. But those moves can easily tip the delicate balance of your DTI and throw off your creditworthiness so that you no longer qualify for a loan,” notes Harrington.
Remember: 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 approval if a material change to the buyer’s situation occurs,” Roberts says.
So 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.
Best practices when buying a house
To improve your odds of getting mortgage-approved and qualifying for a lower interest rate, be financially prudent in the weeks and months before you apply for a home loan.
Roberts suggests three best practices to follow before buying a home:
- First, do not close any active credit accounts. Keep any active revolving accounts open
- Next, do not apply for or open any new credit accounts
- Additionally, strive to pay down your credit balances to 30% of your credit limit or less
Of course, you’ll want to save up as much cash as possible.
Remember that your down payment isn’t the only upfront home buying expense. You’ll also have to pay closing costs, which typically equal 2-5% of the loan amount (or $2,000 to $5,000 for every $100,000 borrowed).
You should keep track of any large deposits to your bank accounts, too. “If you make any deposits into your checking or savings accounts that are not payroll deposits, be prepared to document where they came from,” Roberts adds.
Lastly, review your three free credit reports (available at Annualcreditreport.com) and work to correct or remove any errors or inconsistencies you notice there.
Recap: What not to do before buying a house
Yes, it’s a competitive market. But there are still homes to be had for savvy buyers.
To recap, here are the seven things you should never do right before buying a home:
- Take out a car loan or finance other big items
- Max out your credit cards
- Assume you need 20% down
- Quit or change jobs to a new field
- Go house hunting before getting pre-approved
- Use the first mortgage lender you talk to
- Make big financial changes prior to closing
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.