If you're like most people, purchasing a home is the biggest investment you'll ever make. If you're considering buying a home, you're likely aware of the complexity of the endeavor. Because of the numerous factors to consider when purchasing a home, it's important to prepare as best you can. Some common home-buying principals and caveats are presented here for your consideration. By keeping them in mind, you'll help create a successful and more enjoyable experience. These Top Ten lists are by no means exhaustive. Since your home could cost you 25 to 40 percent of your gross income, it's important to conduct research, ask questions and study the process carefully.
Buying a home
Looking for a home without being pre-approved. As a potential buyer competing for a property, you'll have a better chance of getting your offer accepted by being as prepared as possible. Consider this hierarchy of preparedness:
The benefits available at each level can be easily understood when viewed from the seller's perspective. Imagine you're a seller in receipt of multiple offers to purchase your property. A complete stranger (buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, lets consider the type of buyer you'd prefer to deal with.
Neither pre-qualified nor pre-approved
This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.
This buyer has met with a mortgage broker (or lender) and discussed their situation. The buyer has informed the broker regarding their income, expenses, assets and liabilities. The broker may also have seen their credit report. The buyer provided you with a letter from the broker stating an opinion of what the buyer can afford.
This buyer has provided a broker written evidence of income, expenses, assets, liabilities and credit. All information has been verified by a lender. As a result, much of the paperwork for this buyer's loan has been completed. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the lender. You're as certain as possible that this buyer can close.
As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.
Making verbal agreements. If you're asked to sign a document containing instructions contrary to your verbal agreements--don't! For example, the seller verbally agrees to include the washing machine in the sale, but the written purchase contract excludes it. The written contract will override the verbal contract. More importantly, your state may require that contracts for the sale of real property be in writing. Do not expect oral agreements to be enforceable.
Choosing a lender just because they have the lowest rate.
Not receiving a Good Faith Estimate.
Not getting a rate lock in writing.
Using a dual agent--i.e., an agent who represents the buyer and the seller in the same transaction.
Buying a home without professional inspections.
Not shopping for home insurance until you are ready to close.
Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and do not have time to shop around.
Signing documents without reading them.
Not allowing for delays in the transaction.
Refinancing your home
Refinancing with your existing lender without shopping around.
Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.
Not doing a break-even analysis.
Not getting a written good-faith estimate of closing costs.
See item number four above.
Paying for an appraisal when you think your home value may be too low.
Using the county tax-assessor's value as the market value of your home.
Signing your loan documents without reviewing them.
Not providing documents to your mortgage company in a timely manner.
Not getting a rate lock in writing.
Pulling cash out of your credit line before you refinance your first mortgage.
Getting a second mortgage before you refinance your first mortgage.
Getting a home-equity loan/line
Not knowing if your loan has a pre-payment penalty clause.
Getting too large a credit line.
Not understanding the difference between an equity loan and an equity line.
Not checking the lifecap on your equity line.
Getting a home-equity loan from your local bank without shopping around.
Not getting a good-faith estimate of closing costs.
Assuming that your home-equity loan is fully tax-deductible.
Assuming that a home-equity loan is always cheaper than a car loan or a credit card.
Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future.
Getting a home-equity line to pay off your credit cards when your spending is out of control!