Money – your money – is the prize. Your real estate agent isn't really your friend, and your banker isn't, either. Very few times in your life will you ever feel so besieged by helpful experts yet so helpless once the process begins. When expecting a child, parents design a birthing plan, in an attempt to maintain control amid crisis. If you're expecting a house, recognize the financial pitfalls now, and plan to avoid them.
Mistake 1 – Live In Credit Oblivion
Step 1. Establish your financial qualifications, and correct errors before approaching a bank or real estate agent.
You'll be asking a financial institution to loan you several hundred thousand dollars and trust you to repay it over several decades. Bankers and underwriters will scrutinize your financial history. They may request written explanation for any damaging results that appear on your credit report, and you may have to swallow a higher interest rate.
Request your annual free credit report from AnnualCreditReport.com, and examine what Experian, Equifax and TransUnion have documented.
Before you protest that your credit is good, you might want to know that a recent study from the Urban Institute examined credit data from TransUnion, and found that 35 percent of Americans with credit had a broad range of delinquent debt, whether it was a parking ticket or a credit card payment.
So the second you even contemplate home ownership, look through your credit report.
Mistake 2 – Fail To Budget Realistically
Step 2. Acquire a written, valid pre-qualification letter issued from a reputable financial institution before you even look at a property. View that figure with extreme caution.
The bank will examine your finances and issue a letter confirming that you are "prequalified" for a mortgage of up to a certain dollar amount.
For many potential borrowers, this amount is higher than what their finances will realistically bear. However, you'll need that paper for real estate agents to take you seriously, and you certainly don't want to sign a contract and put earnest money on a house without it.
Mistake 3 – Allow Ignorance To Equal Bliss On Mortgage Rate And Terms
Step 3. Educate yourself, and take the time to understand all the numbers.
Your real estate agent will most likely recommend a banker or even have one in-house. Your primary financial institution will also be interested in issuing a mortgage. You need to explore your options to make sure you get the best rate for you:
- Down Payment. A 20-percent cash down payment will eliminate PMI (private mortgage insurance) fees but could also leave you with no emergency fund reserves when your car dies.
- First-Time Buyer Programs. Some of these mortgages require extra paperwork and home inspections but may offer financial benefits.
- Closing Fees & Good Faith Estimates. Closing fees vary by state and bank and can range from 2 to 7 percent of the total mortgage. Some fees are controllable.
- Fixed Versus Adjustable-Rate Mortgages. ARMs carry very specific terms that change over time. Examine how often interest rates can change, the allowed percentages on each change, and any caps or penalties.
- Escalation Clauses. Some neighborhoods remain in high demand, complete with escalation clauses. If you engage in a bidding war, know your exact payment options for excesses and understand that appraised value may not equal sale value, in turn affecting mortgage terms like PMI.
Mistake 4 – Forego Research And Critical Thinking Skills
Step 4. Measure, measure again and then cut, or check, double-check and then decide.
You very well may be fortunate enough to have a wonderful banker and a knowledgeable real estate agent, but recognize that these people earn their livelihood by making money from people exactly like you. Buying a home is a series of decisions. Once you sign those closing papers, those people will move on to the next deal, and you will be quite alone with your house and all the terms of your mortgage. Some decisions with far-reaching implications concern:
- Agent Choice. The listing agent on that real estate sign works for the seller first. Many professionals recommend buyers have their own representative.
- Home Inspection. Most agents have home inspectors they prefer, and some home buyers have even been known to waive their inspection rights. Buyers pay for home inspections, so choose carefully to ensure your inspector is working for you.
- Home Warranty. Sellers increasingly offer home warranties as part of the deal. Yes, a simple service fee covers repairs – unless the issue is not covered. Major expenses due to dollar limits or uncovered repairs 6 or 8 months down the road can deplete financial resources still recovering from the purchase.
- Surrounding Area. Do your research yourself. Go online. See what parents say about the school system. Check out the academic opportunities and graduation rates. Drive by and count the mobile units. Check the county's website to learn about land and roadway development slated for the area. A beautiful forest can quickly become a housing development, highway, logging area or shopping center.
Mistake 5 – Make Big-Ticket Changes
Step 5. Keep finances steady, save and sit tight.
The entire mortgage process moves toward one goal – closing day – and lenders track your finances every step of the way.
According to Bankrate.com, "Fannie Mae's Loan Quality Initiative, which went into effect in 2010, requires lenders to track 'changes in borrower circumstances' between application and closing." You must hold the financial line:
- Don't let two-car-garage anticipation send you to the car dealer.
- Don't open a new line of credit to upgrade that kitchen with granite counter tops and luxury industrial appliances.
- Postpone changing jobs or careers, and don't endanger the one that you have.
A mortgage is a package deal, with lots of moving parts and pieces. Throw one gear out of sync, and you'll lose any leverage you might have had. The professionals are professional at what they do: issuing loans to excellent risks and matching buyers to sellers. By remembering what's at stake, doing your homework, maintaining responsibility and using educated independence in your choices, you can see a successful mortgage through to completion with no regrets.