While buying a home has always been a challenging milestone, today’s high interest rates have made this dream even harder to achieve.
Over the past two years, interest rates on home loans have nearly doubled from the 3% range to around 7% today. This tacks many hundreds extra onto the monthly expense of housing, stretching some homebuyers’ budgets to the breaking point. And while there are ways to lower those costs, navigating the home loan process is extremely complicated—particularly for first-time homebuyers.
“It’s very important for first-timers to do research and understand all their options before they start looking for a home,” says Cara Ameer, a real estate agent with Coldwell Banker who is licensed in California and Florida. “Doing your due diligence can help you avoid some of the most common rookie mistakes, so you come out not only with the home of your dreams, but also a mortgage you can afford.”
Here are some common blunders homebuyers make when attempting to secure a mortgage.
1. Focusing too much on the interest rate
Probably the most common mistake homebuyers make is simply assuming that the lower the interest rate, the better the deal. But what they might not realize is that to get an ultralow rate, there are often hidden fees—and those fees could mean they ultimately end up paying more.
“Many lenders, especially in more recent years, have started to charge hidden points in an effort to advertise a much lower mortgage rate to potential applicants,” warns Jason Gelios, author of “Think Like a Realtor” and a real estate agent with Community Choice Realty in South East Michigan.
“It’s great to have the most attractive rate, but if the lender has you paying junk fees to obtain that rate, it might not make sense,” he adds.
Mortgage points are a fee that lenders can charge to applicants to lower their interest rate through the life of the loan. This process is also known as “buying down the rate,” and the fee is paid to the lender as its own fee.
In other words, “buying down the rate” or “buying points” are just a fancy way of saying you’re paying more fees upfront to get a lower interest rate.
As a result, it’s important for mortgage seekers to ask for an estimate of all fees included in their mortgage offer, and not just the interest rate.
2. Assuming you need a 20% down payment
“There’s a common but detrimental misconception that’s causing some potential first-time owners to delay starting the homebuying process, and that is the belief that it still takes 20% down to buy,” says Cindy Allen, veteran real estate agent and founder of DFWMoves in Southlake, TX.
In reality, according to a new study from Self Financial, the average down payment needed in the U.S. for first-time buyers is $12,274 (around 6%), in addition to $1,983 in closing costs.
“Fannie Mae has had a 3% down, first-time homebuyer mortgage for years now, which competes with FHA’s 3.5% down,” says Yifan Zhang, CEO of the host-to-own homebuying program Loftium. “The only difference is that home prices have risen so much recently that these programs are probably more popular now.”
However, keep in mind that you will have to pay private mortgage insurance if you put less than 20% down, which increases your monthly payments.
3. Assuming you can get a loan instantly
Many borrowers assume that in today’s instant-gratification culture, they can get a mortgage in days or even minutes. Not so.
“Even the mortgage lenders with splashy apps and websites still may need a phone call, manual document collection, or other time-consuming steps,” says Zhang.
In fact, many home tours might be off-limits until you’ve been vetted by a lender.
“Buyers may not be able to even see a home without providing a copy of their pre-approval letter just to schedule an appointment,” says Ameer. “Many listing agents are requiring that, no matter the price range. This is no longer just for high-end properties.”
4. Thinking pre-qualification means you’re approved for the loan
While getting pre-qualified for a loan is a good first step, it does not mean you’re guaranteed the money. Pre-approval is better because it means lenders have reviewed your finances.
In the past, pre-approval was typically enough to pass muster. In today’s ultracompetitive market, however, you might want to get fully approved from the get-go before you make an offer.
“Full approval means the buyer has been underwritten prior to making an offer—they have submitted all of their required documents, the lender has reviewed it and been able to vet them to basically say they are solid and just need to get an accepted offer on a property for the loan to go through,” says Ameer.
Being fully approved also allows buyers to close the deal in a much shorter time—two to three weeks in most cases.
This can give buyers the edge, as Ameer points out, “given today’s tight market with low inventory. Listing agents are going to recommend their seller ask for shorter time periods for loan approval.”
5. Not considering first-time homebuyer programs
Newbies who feel overwhelmed by the financial barriers to homeownership might be pleasantly surprised to learn that there are first-time homebuyer programs to help them get over the hump.
“You can find programs that offer help with closing costs and down payments, lower interest rates, and even tax credits to free up some of your savings,” says Allen. “And if you’re a first responder or educator, active-duty military or veteran, there are often special programs available for you, too.”
For example, Allen says just this past January she was involved in a $352,000 transaction where the buyers were granted over $6,000 toward closing costs and escrow through a first-time buyer program. They were then able to use the $6,000 they saved as additional down payment funds.
6. Failing to check your credit score
You really need to check your credit score prior to talking to mortgage lenders because ultimately, this number—which represents how well you’ve paid off past debts—will affect the interest rate you’re offered.
“Not tackling easy options for improving your credit score before taking out a mortgage is a big mistake for first-time homebuyers,” says Zhang. “Today, there are tons of credit improvement tools you can use to quickly and easily tackle your credit. Even just paying off a credit card can bump you into a higher credit category and save you hundreds each month on your mortgage.”
At the very least, make sure you know what your score is by checking it with CreditKarma.com or one of the top three ratings bureaus: TransUnion, Experian, and Equifax.
7. Picking the wrong type of loan
Are you better off going with an FHA, VA, or USDA loan or some other type entirely? Don’t know what these acronyms mean? There are many types of mortgages available, each with its own pros and cons based on your own personal circumstances.
“Know your loan options because an inexperienced loan representative may not know all the available programs or may not present all the possibilities,” says attorney Bruce Ailion, a real estate agent with Re/Max Town & Country, Atlanta. “Learn about the types of loans before talking with a professional to know the right questions to ask.”
8. Underestimating fees beyond the down payment
The down payment is not the only cost you’ll have when buying a home and securing a mortgage.
“People talk about the down payment required but rarely talk about the ancillary costs required for purchasing a home like closing costs, title, appraisal, and first-year homeowners insurance upfront,” says Nicole Rueth, senior vice president and producing branch manager, The Rueth Team of Fairway Independent Mortgage Corp. “It’s a mistake not to factor these in, because they can add up to an additional $5,000 to $12,000 down.”
9. Not preparing for the possibility of a low appraisal
Before lenders front the money for a house, they will have an independent home appraiser estimate its value. Many first-time buyers don’t realize that with listing prices so high, it’s entirely possible that their appraisal will come in lower, which means the lender will loan only that much.
“Given the rapidly rising asking prices and multiple-offer scenarios going on, it is quite possible that a property may not appraise at the agreed upon contract sales price. But a bank is only going to base their loan amount off of the appraised price, not what a buyer and seller agreed to pay,” says Ameer. “Buyers may not be able to come up with the cash to cover the difference between the appraised value and the contract sales price, so only offer what you know you can cover out of pocket should that happen.”
10. Not shopping around for the right lender
Not all lenders are created equal and work the same way. That’s why you really should shop around and find someone you trust who will pick up the phone when you call.
“In today’s market, it is imperative that you work with someone reputable who is reachable by cellphone seven days a week, because various questions and scenarios will come up as you embark on your property search and you may need some guidance that is crucial to having the winning offer,” says Ameer. “These situations often happen outside of typical office hours.”
This is one reason real estate agents typically prefer to use local lenders because they are accessible and reliable.
“Local lenders have a proven track record to maintain and value not just the client but the Realtor relationships they work hard to create,” says Kim Jungles, a loan officer with Atlantic Coast Mortgage in Ashburn, VA. “Online lenders for the most part are very difficult to speak with, let alone be available to write a pre-approval letter after 5 p.m. on Friday.”
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