If you want a new home and can afford it, now is an exciting time to buy. According to the National Association of Home Builders, prices nationwide are the most affordable they’ve been in decades. Interest rates are low. And there shouldn’t be a supply problem – RealtyTrac predicts a lot more foreclosures ahead.
One potential fly in the ointment? Getting the loan.
As you already know if you’re a house hunter, mortgage financing is no walk in the park. “Extraordinarily tight standards currently prevail,” Elizabeth Duke of the Federal Reserve said in January. “Borrowers who likely had access to mortgage credit a few years ago are now essentially excluded from the mortgage market.” Why the tight standards? Once bitten, twice shy: Lenders left standing after the foreclosure tsunami are requiring more documentation, stricter appraisals, and bigger down payments.
That’s one thing that can turn “buyer’s market” into “buyer beware,” but not the only thing. Here’s a look at potential buyer pitfalls:
1. Dumb move: not first finding financing.
Many people who would have qualified for a loan a couple of years ago don’t today. Or if they do, it’s for a lower amount. Don’t shop for homes until you shop and get pre-approved for a mortgage. Shop without financing and you’ll risk watching your dream house sold to a more qualified buyer.
Months before you set foot in your first house – a full year is better – start preparing. Check your credit score: A low score will keep you from qualifying, or result in higher rates that will cost you thousands of extra dollars over the life or your loan. (To see how much, check out this calculator from credit score company FICO.) If you find you’ve got credit score issues, address them: See 3 Tips to Raise Your Credit Score – Fast.
When your credit score is as good as you can make it, go loan shopping. To learn more about cutting through fees and getting the best possible deal, check out Follow These 3 Steps to Save Thousands on Your Next Mortgage.
2. Dumb move: lowballing.
Combine desperate sellers and a flood of foreclosures and you’ve got the perfect environment to bag a bargain. But be careful. Not all sellers are desperate and not all respond well to lowball offers. While it’s nearly always a good idea to offer less than the asking price, trying to “steal” a house can backfire. Make a ridiculously low offer and the seller may not take you seriously. Worse, they may so insulted they refuse sell to you at all.
Don’t expect much help from your agent. Since they’re motivated to close the sale, many will want your offer to come as close as possible to the asking price. That’s why knowing things like neighborhood “comps” (comparable prices of similar nearby homes) is so important. So is knowing the seller’s loan balance. It may be impossible – and will certainly be more complicated – if you enter “short sale” territory by offering less than the mortgage.
3. Dumb move: buying without inspecting.
Would you marry a complete stranger? Buying a home without first having it professionally inspected is just as dumb.
Never submit any written offer that doesn’t include a time period to thoroughly inspect the house. The primary reason is obvious: It protects you from a potential disaster. But another, more subtle reason is nearly as important. The results of an inspection may help negotiate a lower price, because an inspection nearly always reveals problems with the home.
A real estate agent can refer you to a qualified home inspector, but you can also look up local home inspectors through the American Society of Home Inspectors website. The few hundred dollars they charge could be the best money you’ll ever spend. If you’re looking at a foreclosure or short sale, this is doubly important, because if the owners couldn’t afford to keep the house, they probably couldn’t afford to maintain it properly.
4. Dumb move: not having “outs.”
To get a contract, buyers typically have to put down “earnest money” – a deposit of a few percent to prove they’re serious. Backing out means you don’t get your money back, unless you did it for a reason listed in the contract, known as a contingency.
One contingency was noted above: an inspection contingency. But there are others, including not being able to get financing, not being able to sell your existing home or a low appraisal. In general, the more outs you have, the better. But the opposite is true for the seller. (See 5 Mistakes Home Sellers Make). So if you give yourself too many escape hatches, expect some push-back.
5. Dumb move: not crossing “t’s” and dotting “i’s”
Buying a home is an emotional decision. Which translates into potential problems for those using their hearts instead of their heads.
Entering into a contract to buy the house of your dreams will feel like the end of the process, because you’ve shifted from hunter to homeowner. You’re mentally arranging your furniture and deciding what color to paint the kid’s rooms.
Don’t let down your guard yet. The process of closing on your new home is an opportunity for the professionals on the sidelines to throw a few fees your way. Carefully go over the paperwork and understand everything you’re expected to sign and every fee you’re expected to pay. If you don’t understand something, ask about it. If you find a fee you didn’t expect, challenge it. And if the paperwork blizzard leaves you feeling like a deer in the headlights, hire help.
– Brandon Ballenger is a writer for Money Talks News, a consumer/personal finance TV news feature that airs in about 80 cities as well as around the Web. This column first appeared in Money Talk News.