If you’re watching mortgage interest rates hit rock bottom, you might be on the hunt for a home.
Buying a home is most likely going to be the most expensive thing you ever do. It’s not really something you go into haphazardly; it’s not a candy bar you grab at the grocery store checkout.
Because of this, you don’t want to fall victim to major homebuying mishaps, like when you overpay for a house, pay more than you need to in interest or lose out on the best deal. Here are the biggest mistakes to avoid.
1. Not getting preapproved first
The best way to show sellers that you’re serious about a property is to get preapproved for it first. A preapproval letter is when you submit a mortgage application before you even identify a property you want to buy. Your lender pulls your credit report when evaluating your details so you can see how much money it’s willing to give you for a home loan. This essentially means you’ve all but secured financing for your future home.
That letter is what sellers and real estate agents want to see. It’s different from getting prequalified, which is when you can get estimated rates and terms based on the information you provide lenders. Preapproval is when lenders pull your credit report. Sellers will take you seriously if you have a preapproval letter.
2. Visiting homes that are too expensive
Window shopping is fun when it’s clothes or shoes, but when it comes to homes, you’ll just get your hopes up. Getting prequalified — and later, preapproved — will show you how much home you can afford. Looking at homes that are out of your budget is you telling yourself it can work when it can’t.
It’s also a good idea to look for homes that are well under the figure you’re approved for. That will give you some wiggle room when you’re negotiating with the seller (and possibly competing with other buyers for the same home).
If you’re hung up on getting a home that’s out of your price range, you may want to consider holding off buying until you have a higher down payment or your income increases.
3. Skipping lender comparison
Not all mortgage lenders are created equal, which means when you start looking for potential lenders, you can compare many offers at once. Some only require prequalification, which means you can check out lots of offers without triggering a hard credit pull.
When you’re comparing lenders, look at what each one is offering, including interest rates, fees, repayment terms and even nonfinancial things like customer service and how fast your application is processed.
4. Not checking your credit first
Your credit score is the most important part of getting approved for a home loan. Lenders are turned off if you have a lot of debt or you’re late on paying some off. It means you could be late paying off your mortgage.
Before you get preapproved, see what the lenders will see and check your credit score. You can do this online for free through your bank or credit card issuer, or online services Mint and Credit Karma. Review your credit report and remove any errors and if possible, bad marks.
5. Carrying around a lot of debt
While your credit score is the most important factor in determining your home loan approval, how much debt you have is a very close second.
Your debt-to-income ratio is how much debt you carry compared to how much you earn. Add up your monthly payments, not including expenses such as groceries, utilities or gas, but:
- Home payments
- Student loans, auto loans or other monthly loan payments
- Credit card payments
- Child support and alimony payments
Then divide by your gross monthly income. That percentage is your DTI. The lower your DTI, the better, but lenders like DTIs at 36% or less (some lenders will accept DTIs as high as 50%).
6. Missing the chance to rate shop
Rate shopping is when you apply to many different lenders at once to get the best rate. When you’re looking for preapproval letters, you can apply to a few different lenders and compare offers.
When you rate shop and get multiple preapproval letters, you have the chance to negotiate with many lenders. Use them to secure even lower rates than what you’re offered.
Similarly, you should also rate shop home insurance to compare coverage and rates.
7. Saving all cash for the down payment
A hefty down payment is important, but putting all your money into your down payment means you might not have enough to cover other costs.
For one, you’ll need a chunk of cash for closing costs when you close on your home. While some loans will let you roll closing costs into your home loan, that means you’ll pay interest on it as time goes on. That means more money out of your pocket in the long run.
You might also need money for moving costs or home improvements. If you want to paint the walls or get a new closet system installed before move-in, you’ll need to pay for those upgrades. Putting all your money into your down payment means you could end up “house poor,” which is when you put all your money into mortgage-related costs and you don’t have money left for anything else. You can avoid becoming house poor by finding a home that’s within your budget and saving enough money that’s separate from other home expenses.