There are a plethora of articles about what to do before buying a home, especially for first-time homebuyers. But has anyone ever told you what you shouldn’t do? Of course, some of these are just a different way of writing the same things you’ve heard before. But others are advice you may not have been provided.
The biggest mistake to avoid is financing a big-cost item, such as a car, immediately before looking to get a home loan. Lenders will see that, and they’ll know you’ve just taken out a loan and will have debts to pay. That doesn’t look good for your credit score or your debt-to-income ratio. Similarly, avoid maxing out your credit card debt, even if it’s on many smaller items. It doesn’t even matter if your limit is low; what lenders look at is the percentage of your limit that is used. Another thing that may make lenders look more closely is a change of jobs. If you’ve simply moved from one company to another in the same occupation, you’re fine. But if you switched career paths or lost your job entirely, that looks like instability. All this advice continues to be relevant throughout the purchasing process — don’t make any big financial decisions until the transaction has closed.
Some other mistakes relate more specifically to real estate and not simple economic decisions. Many buyers neglect to get a preapproval before they start looking, thinking it’s a long process that they don’t want to get involved in before they find something. Yes, it does take time, but if you wait, that house you found may not be available anymore by the time the process is finished. Not only is this something sellers look for, preapproval will help you figure out what you can afford. It makes the search a lot easier if done ahead of time. Don’t try to expedite the process by just going to the first lender you find, though. The rates quoted in the news are always averages. Not every lender is going to have the same rates, and the rate isn’t the same for every situation. And contrary to popular belief, your personal bank doesn’t owe you the best rates just for being their customer. Once you know what you can afford, figure out how much your down payment is going to be. Don’t make the mistake of thinking it has to be 20% or more. That is frequently a good idea, since it avoids private mortgage insurance, but it’s still possible that paying the PMI and putting less down is a better financial decision for you. Plus, it’s almost never a good idea to put off buying solely because you can’t afford to put down 20%.