Mistakes Before Applying for a Home Loan
A home is probably going to be the largest personal purchase you’ll ever experience. Sadly, lots of people make the worst mistakes when buying a home — mistakes that can amount to tens or hundreds of thousands of dollars in additional interest, or burden you with a home you are not able to afford or sell.
The following are some of the most common examples of homebuyer mistakes made each year. Continue reading if you want to avoid them.
No. 1: Not knowing your credit score
Your credit score is one of the biggest factors in determining your mortgage interest rate. The other is your down payment or equity in your home.
Home buyers with high credit scores receive the best interest rates from lenders. They understand that people with excellent credit scores are the best type of borrower who is unlikely to be late or default on their loan.
On the other hand, lenders are concerned with borrowers who have credit scores under 620. Scores like this indicate you’ve had challenges with more than one credit account. The offer for borrowers with a higher credit risk means a higher interest rate.
For example, you’ve put in an offer to purchase a $600,000 home and make a $60,000 down payment. A 30-year mortgage with a fixed interest rate of 4 percent will cost more than $388,000 in interest payments throughout the life of the loan.
If you have an interest rate that’s 1.5-2 percent more due to recent credit challenges, at 6 percent, you would have to repay roughly $625,000 in additional interest. That works out to $225,000 more than you would have paid if you had been approved for the lower rate.
Make sure your credit score is the highest it can be prior to shopping for a home. If it’s really low, find out some ways to raise your credit score so you can secure a better rate.
No. 2: Not getting pre-approved for a home loan
Mistakenly, some people use the terms pre-approval and pre-qualified interchangeably as if they’re identical. In all honesty, a pre-approval for a mortgage isn’t the same as being pre-qualified.
A borrower who has been pre-approved has had their financial and employment condition verified and passed by the lender. This means that, the lender can offer you a a maximum loan amount to borrow for a home purchase. Someone who is pre-qualified means the loan originator simply took your word about your qualifying income, assets, debts, and credit score.
No. 3: Buying without an agent or an inexperienced agent
A large majority of the time it’s a mistake to do it yourself as a home buyer. A good agent can let you know about properties coming onto the market, connect you with quality lenders and home inspectors, and typically find solutions for any problems that may surface.
Just because your brother’s friend’s uncle is licensed and available doesn’t mean you have to accept him as your agent. Especially, if they are not experienced and are a part-time agent. A home purchase involves thousands of dollars, so a proven experienced professional agent to guide you through the process is highly desirable.
No. 4: Not having a home inspection
Regardless of purchasing new construction or an existing home, you should get the home inspected by a professional prior to completing the transaction. Don’t trust your own assessment. A good home inspector will be able to show you and put on a report any local code violations, safety hazards, or damage to the structure.
A home inspection well worth the cost for a new or older home. if you pass this up, you may discover after moving in that your home has some expensive things to fix or a problem that is very dangerous.
If you become alarmed that your home inspection comes back with problems you are not alone. Industry professionals and people who have bought multiple homes before understand problems will always be found after an inspection.
Homes tend to have small maintenance fixes the inspector comments on but are not usually required to be fixed or concerned about immediately.
Items to be concerned about typically include electrical outlets, plumbing, and heating malfunctions. Sometimes the inspection report comes back with something you, or ideally your real estate agent, request to be repaired or ask the seller to give a closing cost credit for the cost of the repair.
No. 5 Taking a New Job
The underwriter will be very concerned if you get a new job halfway through the loan process. It can seriously affect your pre-approval.
However, some job changes are more welcoming than others—such as getting a promotion with a similar salary structure at your company or even making a lateral move to another. Lenders are not OK with you changing industries.
You may be tired of your low-paying writing job and ready for a financially rewarding career as a software designer? Lender want to see a two-year proven track record of being able to work as a software designer. Overall, the best thing to do is to remain where you are until after you’ve closed the transaction
