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The process of buying a home is just that – a process. Like with any major process there are a multitude of potential missteps to avoid. Let’s discuss three huge ones.
Failing to Consider Your Spending Habits and Expenses
Lenders qualify you for what you technically can afford based on review of income documents and debts listed on your credit report. Your monthly debt-to-income ratio is primarily calculated this way .
Your disposable income – passions, hobbies, habits and vices – is not part of the equation mortgage lenders, but it definitely should be for you.
For example, let’s take two co-workers – Bob and Susan – making identical salaries with a take home pay of $75,000 or $6,250 month. They both have $450 car and $300 in student loan payments a month.
On paper they look identical to a mortgage lender, but they have some very different spending habits.
Bob plays golf every weekend and each round costs $75. He and his golfing buddies hang out after their round, grill some steaks and watch the game. They all pitch in $30 for the supply run at the local grocery store. He also likes to take the edge off of a long day of work with a couple drinks at the neighborhood pub – spending about $75 a week.
Susan is a homebody. She heads straight home after work to play with her cats and watch Netflix. She abstains from alcohol and spends her weekends hiking. Mostly free activities.
Technically, Bob and Susan would have the same debt to income (DTI) ratio and qualify for the same amount of mortgage loan. However, Bob actually has about $780 less a month – due to his lifestyle choices – to work with than Susan.
Some homebuyers – like Bob – often end up with a mortgage payment they can only afford by scaling back on the things they enjoy – life’s little pleasures.
Being “mortgage poor” and having to eliminate the things that make you happy in life is no fun at all and it’s a trap you definitely want to avoid.
Finding Your Home Before You Find Your Mortgage
This is the biggest and often most costly mistake that homebuyers make – putting the cart before the horse.
You should always – and I repeat always – get pre-approved before you even start looking for a home. You absolutely should not even consider making an offer with one.
As an added word of caution, any real estate agent who takes you to look at a home – let alone draws up a purchase contract – without first seeing that pre-approval letter is not qualified to represent you. Find a qualified agent.
Why put yourself under the gun? Not only will your potential offer be much stronger with a pre-approval, it will likely be required for consideration of that offer.
Getting your financing all set before an offer gives you time to qualify for the most attractive loan at the best possible interest rate. That’s in addition to the confidence that comes from knowing you’re a qualified buyer.
The best course of action is to start talking to your mortgage lender at least 6 months before you begin shopping. That way you can make those small tweaks to your credit profile that make all the difference in the world when you apply for the loan.
Tweaks like paying down debts, removing errors from your credit report and getting your assets straight for the down payment might be needed and they can sometimes take a little time to complete.
Not Reviewing Documents and Disclosures Fully
Mortgages require a lot of paperwork and generate a lot of disclosures to sign – a whole lot. Some of it is redundant, maybe most of it – especially the disclosures. It can be daunting for those new to the process.
That said, each new set of disclosures is going out for a reason. Something changed, maybe multiple things changed. It could have been locking your mortgage rate or receiving the appraisal or fees changing.
It pays – literally – not to phone it in when you review the documents. Thousands in surprise closing costs adding to your cash to close could start you off on the wrong foot before you make your first mortgage payment.
It could also cost you tens of thousands during the life of the loan.
With the advent of the new mortgage disclosure rules implement in late 2015 things did get a little easier for borrowers. There are two primary documents to focus on – the Loan Estimate and the Closing Disclosure.
1. Loan estimate – key things to look for:
- Mortgage rate
- Monthly payment
- Loan terms
- Total cost of the loan
- Cash to close
2. Closing disclosure – key points:
- Did you receive it three days prior to close?
- Does it match the loan estimate?
- Are the interest rate and the APR the same?
- Is the monthly payment what you expected?
- Do cash to close numbers look similar to previous estimates?
If you see any increases or additional fees you weren’t expecting talk to your mortgage lender immediately. Some numbers are allowed to vary, but not your mortgage rate or lender fees. Check both against the last loan estimate you received thoroughly.
This is by no means an exhaustive list of poor form when buying a home, but it does contain three key components to a successful purchase.
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