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6 Mortgage Mistakes Newbie Homebuyers Make (and How to Avoid Them)

Mortgage mistakes happen to the best of us. This article outlines the six most common ones, so you can give them the slip on your way to buying your dream home.

If you’ve never applied for a mortgage loan before, don’t be afraid of the process. When you know what’s involved and what to be on the lookout for, you’ll be able to work around any complications that may arise. And by way of introduction, we’re Rabell Realty Group, a real estate agency serving Gainesville, Tampa, Saint Augustine, and everyone in between.

1. Searching for Homes Before Getting Pre-Approved

In competitive markets, sellers have the luxury of only considering offers from approved buyers.  Give yourself a leg up on the competition–and avoid getting your hopes up–by getting pre-approved before you start your home search.

A pre-approval letter tells sellers that the lender has done their due diligence. They’ve found you to be a a credit-worthy applicant with a solid employment history. The pre-approval letter lists the loan amount you qualify for, your interest rate and loan program, and your estimated down payment amount.

Getting pre-approved has other benefits. By consulting with a lender during the pre-approval process you’ll know about any potential credit issues. You’ll also learn what loan programs are out there, and how much you can borrow. (Tip: Don’t aim for the top of your spending limit.)

2. Not Shopping Around for Mortgages

You can leave a lot of money on the table by not shopping around for a mortgage lender. Applying for a mortgage with a few different lenders gives you a basis for comparison and puts you in a stronger negotiating position.

As you shop around for lenders, be sure to ask your real estate agent for a few of their preferred lenders. Your agent can help you find some of the best local deals and make sure you’re on the right track with your lender, since they know their preferred lenders’ methods and style.

Pay careful attention to closing costs and fees. Between the appraisal, credit check, title search, and other fees, closing costs can easily add up to 2-5% of the mortgage amount. Lenders that promote low or no closing costs tend to charge higher interest rates to make up the difference. That can cost you in the long run. Other lenders may offer discount points, which lets you to buy down your interest rate upfront, but increases your closing costs. Again, it’s a good idea to ask your realtor for advice here.

Know that the average home buyer in the US paid $5,749 in closing costs (including taxes) in 2019, according to a ClosingCorp report. If you don’t have enough cash on hand to cover these costs, there are a few ways to work around this problem.

  • Look into state and federal assistance programs. There are more than 2,000 down payment and closing cost assistance programs around the country.
  • In less competitive markets, ask your agent to make a deal with the seller to pay for closing costs

3. Not Taking Advantage of Down Payment Assistance Programs

There are many down payment assistance programs out there for first-time homebuyers. The programs and terms vary by county or city. The Florida Bond Program is available to all first-time Florida homebuyers. Through Florida Bond, you can qualify for the Florida Assist down payment assistance loan, which provides a $7,500 loan with a 30-year term, 0% interest and $0 payments as long as you occupy and do not refinance the property.

You might be surprised to learn that Florida Bond defines a first-time homebuyer as anyone who hasn’t “owned and occupied a primary residence within the past three years.” Under this weird definition, you may still qualify for the program even if you’ve purchased a home before. Veterans are exempt from the first-time homebuyer requirement altogether.

Check with your lender to see if they provide a grant program, such as Chenoa Fund, that doesn’t require the buyer to be a first time homebuyer and doesn’t have income limits. Chenoa works when other options don’t and only a few lenders offer it.

Assistance programs typically have minimum credit scores, income, and DTI ratios that you need to hit to qualify.

4. Making Big Purchases After Mortgage Pre-Approval

It makes total sense to want to make big purchases such as appliances and furniture in preparation for homeownership. But as a new home buyer, know that making big purchases after pre-approval can jeopardize your qualification status.

Why do big purchases matter? When you apply for a mortgage, your lender looks at your debt-to-income ratio (DTI), or your monthly payments compared to your income. Lenders typically want to see that your monthly expenses don’t eat up more than 43% of your pre-tax income.

Financing major purchases increases your DTI by adding to the payments side of the ledger. A higher DTI can result in delays, or in rare cases, a turned-down loan.

Paying in cash could also be a problem. You don’t want to fall below the minimum cash “cushion” threshold. That’s typically two full mortgage payments) after subtracting the amount needed for the down payment and closing costs.

Talk to your loan officer before making big purchases after pre-approval. If you want to avoid risk altogether, wait until after you’ve moved into your new home.

5. Changing Jobs

OK, this one isn’t a mistake so much as an opportunity for us to talk about how lenders look at employment income. Getting a mortgage during a job transition is actually quite common, and not a deal breaker. A lot of people relocate for work and want to buy right away instead of having to move twice. But you should know how lenders look at employment income.

Standard mortgage applications require you to give a two-year work history. If you’ve been at your current job for less than two years, your history in your industry comes into play. Lenders will look at your qualifications and work history. Increases in pay and responsibility over time look good; large gaps in employment, not so good.

If you changed jobs recently, lenders will have questions. Most job changes should not affect a mortgage application. Lenders will view a higher-income move or a “next-level” career move in a positive light. A move from a salaried position to a bonus or commission structure may not be viewed as positively. A change to a completely different industry or a history of job-hopping may also be viewed negatively.

Lenders want to see long-term job stability. If you can, avoid making a big career change until after you’ve secured your mortgage.

6. Not Hiring a Real Estate Agent

As shamefully self-promoting as this one is, we’d be remiss if we didn’t tout the benefits of hiring a real estate agent. Agents who’ve been around the block can put you in touch with trusted lenders, home inspectors and title companies, and can refer you to down payment and closing cost assistance programs in your area.

Experienced real estate agents have in-depth knowledge about the real estate markets and neighborhoods they service that they can share with you. With a buyer’s agent you can rest assured that you aren’t paying significantly more than your neighbors. A good agent can also help you narrow down your choices and spot issues, saving you time and money.

We’re Ready to Help!

Thinking about buying a home in our service area? We’d love to learn more about you and how we may help you find your dream home. Feel free to say hi via our online contact form, or give us a call at 352-559-8820.

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