Top 3 Biggest Mistakes Homebuyers Make
Time, money and sometimes your dream home could be at risk if one of these mistakes goes out of control.
It still surprises me how many homebuyers are convinced to make offers, and go into escrow without addressing these key components of your financing approval.
The most common result of making one of these mistakes is that your close of escrow can be delayed by days, or even weeks.
In the most extreme of cases, making one of these mistakes can be a ticking time bomb that will prevent you from reaching the close of escrow.
Top Three Mistakes Homebuyers Make
Mistake #1: Pre-Approval vs Pre-Qualified
About 2 to 3 times a week, I will get a call from someone that has been told that they are approved up to an amount, when in fact they are not.
This is the hardest type of conversation to have, because you don’t want to believe that someone would blatantly mislead you like that, to what end?
The truth lies somewhere in between
Are you to think that the loan officer is purposely misleading you? or made an honest mistake?
I don’t believe for a moment that you’re being purposely misled.
I do believe that you’re being told what they think you want to hear, without taking the responsibility of being accurate, seriously.
When a calculation is off that much, it’s because:
- You were Pre-Qualified, and the loan officer did not review your supporting documentation, or
- You submitted your supporting documentation and the lender did not review it properly
It’s tricky when it comes to being pre-qualified vs pre-approved. As a homebuyer, you want to know if there’s a “chance” that you will qualify, before allowing a full financial forensic analysis of your last two years.
There is always a tug-of-war that goes on between a loan officer needing documentation to give you an accurate answer, and you, the homebuyer, not wanting to dig up all the paperwork if there’s not chance that you will qualify.
Do you see where the confusion can come from? An experienced loan officer can, with some degree of accuracy, identify whether or not there is a chance you will qualify.
This is at best, and educated guess. If you take that information, and start making offers on homes for sale, you have just made big mistake number one!
You are only Pre-Approved if your lender has fully reviewed your last 2 years income, 60 days of assets showing money to close, credit, and probability of continued employment. Even then your preapproval may be a lie.
Most lenders will also run an automated underwriting approval like Fannie Mae DU, or Freddie Mac LP. This automated underwriting approval, along with a pre-approval cover letter from your lender should accompany every offer your Realtor makes on your behalf.
It’s when lenders issue a “letter” without backing up the approval with documentation, that gets homebuyers in the most trouble. A miscalculation of income can make the difference between being approved, or being declined.
Mistake #2: Financial Transparency
Many times it feels like applying for a home loan is like going on a first date. Both parties are trying to put their best foot forward, and do not want to ruin the date with potentially bad news.
A perfect example of this is where you are getting your down payment and/or closing costs from. When unusual deposits, or transfers occur between accounts during the pre-approval process, this can often lead to more paperwork required to paper trail the movement, or source of all funds.
Other common “transparency” issues that we often see include:
- Source of Down Payment
- Source of Closing Costs
- Overtime income
- Bonus income
- Second job income
- Receiving a W2 from your own corporation
- Ownership in other properties
- Past financial hardships
The details of these potential issues cannot always be identified through a conversation. If you go through the full Pre-Approval process, your loan officer should be able to identify most of these issues.
In some cases, these issues are not caught until the loan officer submits the file to underwriting. At that point, you are already in the escrow process, and changes are not good.
Mistake #3: Jumping the Gun
The 30 or so days from when escrow is open, until your expected close of escrow date are nerve-racking times. It is important that you are patient, responsive, and under financial lock down until after your close of escrow.
Be Patient – The Escrow process is a game of hurry up and wait. There are timelines, expectations, and many people involved in finding solutions to the many common issues that pop up. Days can go by without an update, then things will move very fast. It’s a somewhat predictable, but relatively volatile timeline. Good communication between all parties will cut down on surprises.
Be Responsive – When your Realtor®, or lender asks for documentation, signatures, or information, respond as quickly and accurately as possible. Many times, important questions can be holding up the process from moving forward.
Financial Lock Down – Lenders will do what is called a “soft pull” on your credit before funding your loan. The purpose of this is to look for new credit lines. New credit lines mean new payments, which means that your loan needs to be re-approved including this new payment. You DO NOT want this happening to you at the close of escrow. Financial lockdown is the best policy.
The moral of the story here is that most mistakes can be prevented by understanding what the pre-approval process should be like.
An ounce of prevention is worth a pound of cure
The more work you put in up front, the smoother the process once you’ve had your offer accepted.
Here are a few tips for preventing mistakes during the home buying process:
1. Ask for an automated underwriting approval.
2. Provide all of your documentation up front.
3. Most of all, be patient, it takes time to prevent mistakes.
Read the 10 Commandments of Buying A Home
Additional Reading: The Ultimate First Time Home Buyer Guide
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