By: Mitch Mitchell
For many people — especially first-time homebuyers — the process of buying a home can seem a little off-putting. To the unaware, it can look as if a huge financial fire-pit will swallow up unsuspecting newbies, especially if they don't have a guiding hand.
While it's not that dramatic in real life, there is a bit of truth to the notion that there are things you can do to avoid unnecessary hiccups and make the process so much smoother.
This blog looks at 3 of those hiccups, with advice to keep you from falling into a new home booby-trap! Let's get started.
Hiccup #1:
Ignoring life's little pleasures
When getting pre-qualified for a mortgage, lenders look for what you technically can afford based on a high-level review of income documents you provide and debts listed in your credit report. Basically, they're looking at your monthly DTI, or debt-to-income ratio.
What mortgage lenders are not looking at when evaluating your ability to pay back a loan is disposable income. That's the money you spend on things like hobbies, vacations and indulgences. Skipping over this chunk of change, that is, not disclosing your disposable income spending to your mortgage lender, could make your life very difficult down the road.
Let's say that you have a steady job, tell the mortgage lender your income and are honest about the amount you pay in rent, car loans and student loan payments every month. Your loan officer will calculate your DTI and help qualify you for a loan that, on paper, you'll easily be able to afford.
That's great if you're bypassing after-work parties with colleagues, spending weekends watching Netflix, cooking from home and taking up free activities like bike riding, nature hikes and doing crossword puzzles.
But most people don't behave like that day-in and day-out. There may be dinners out a few times a month. Throw in a round of golf or tickets to a concert or a movie. Or a weekend away or a get-together with friends for weddings, birthday parties, even clothes shopping. You get the picture.
Mortgage lenders may not ask how you spend your savings, so take the opportunity to take the high road and be very honest to yourself. Because depending on which version of you you are, the one doing crosswords or the one on a weekend golf getaway, you might end up “house poor” and have a mortgage payment you can only afford by scaling back on the things you really enjoy. That alone could turn your dream home into a nightmare.
Hiccup #2:
Finding that the home you can't live without is also a home you can't afford
Without a doubt, the most costly hiccup that homebuyers make is putting in an offer on a house before having a clear picture of what you can afford. It's like going grocery shopping on an empty stomach — you're always going to buy way too much and may regret things in the long run.
If you take away just one tip from this blog article, let it be this: always get pre-approved for a loan amount before you even start looking for a home. And if you can't resist looking around, then at least follow this advice: never make an offer on a home without a pre-approval.
Getting your financing in order — and knowing the budget you have to work with — gives you four advantages in the home buying process:
- it focuses you on neighborhoods, and properties in those neighborhoods, that are within your range
- it keeps you from wasting time at open houses that are beyond your means
- it gives you time to qualify for the loan that fits you best — and at the best possible rate
- it tells the seller you are a seriously qualified buyer and gives you the confidence to make a firm offer in a competitive market
Our advice is to seek out a mortgage lender at least 3-6 months before beginning househunting in earnest — even before working with a real estate agent. With this much lead time, you have an opportunity to pay down debts, save a little more down payment and remove errors from your credit report. These adjustments to your credit profile could result in hundreds of dollars of difference when it comes to getting a better mortgage rate.
With a mortgage pre-approval in hand, when you finally find the home you want, your offer is much stronger and you'll have more of a chance to end up in a new home that you really love and can afford years down the road.
Hiccup #3:
Being lax about paperwork
Let's be real about this: getting a mortgage means managing paperwork. Documents and disclosures sail back and forth between the lender and the underwriter, the lender and the borrower, the buyer and the seller, and everyone and the closing agent.
Some of this paper shuffling and signatures required may feel redundant and you may feel like you have already been asked for and have supplied certain information multiple times. That's because many things can change during the course of buying a home — locking in a mortgage rate, receiving an appraisal, dealing with inspections and subsequent negotiations. It's the nature of the beast and it can make the process feel daunting for first-time homebuyers.
So don't be casual when it comes to reviewing paperwork. If you don't pay attention, you may be surprised by additional closing costs you weren't expecting. And if your closing costs end up more than you hoped for, you're starting off on the wrong foot before you even make your very first mortgage payment.
If documents (and document requests) aren't reviewed carefully, it could also end up costing you thousands of dollars over the life of your loan.
Here are some key questions to cover with your mortgage lender. Don't be afraid to ask repeatedly, as things can shift during the loan process.
- What is the Annual Percentage Rate (APR)?
- What is the mortgage rate?
- What is the total payment you need to make each month to stay current?
- What are the loan terms?
- What is the total cost of your loan?
- How much cash will you need at closing (Cash to close)?
Then,as you get closer to closing day, keep a close eye on the closing document package, which should be delivered to you within three days of the closing date.
- Does the total amount match the loan estimate your lender communicated early in the process?
- Is the interest rate the same as the APR?
- Is the monthly payment in the closing docs what you expected from earlier discussions with the lender?
- Is the cash needed to close the same (or at least very close) to the last estimate you received?
Reach out to your mortgage lender immediately if you see increases or fees you weren't expecting. Some figures will be more fluid than others. For instance, a simple thing like moving the closing date by a day or two can shift a number up or down. But mortgage rates and lender fees should be unchanged. Check both against the last loan estimate you received thoroughly.
Ready to buy a home hiccup-free?
Sure, the entire home-buying process sounds like a massive undertaking, but the secret is to be prepared. If you follow our advice — be honest about your spending, get pre-approved before you shop for a home, and carefully review all paperwork — you'll do fine.
To get started on the right foot, find a loan officer early on. They'll help you navigate the whole hiccup-free process with more confidence.
