6 Things Homeowners Regret Not Knowing Before Buying a Home

published Jun 18, 2019
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Buying a home is stressful. In fact, one survey found that one in three homebuyers shed tears during the process and that two in five first-time buyers described it as the most stressful event in modern life.

Those can be some discouraging stats if you’re aspiring to shop for a home and secure a mortgage of your own.

But it doesn’t need to be this way. Step one: Deep. Breaths. Step two: Learn from homeowners who have “been there, done that” and mortgage pros who can help make the process more seamless.

Here are six things homeowners often wish they knew beforehand about the mortgage process:

1. Your bank probably can’t offer you the best rate

In a recent Porch survey, one-quarter of homeowners said they regret not shopping around for their mortgage. A common mistake (that I, myself, made)? Starting the mortgage search at their personal banks because it feels most familiar.

“Your own bank is limited in the loan products they can sell you because they’re not looking to sell other banks’ products,” says Josh Goodwin, a Tampa-based lender with Goodwin Mortgage Group.

Mortgage brokers, on the other hand, don’t work for any specific banks and can find you a wider variety of loans, often at better rates. In my case, my credit union was offering a 4.5-percent interest rate on a 30-year fixed-rate mortgage, but I was able to get a 4.25-percent rate on the same loan terms by working with a broker when I bought my first home in late 2011.

2. The best interest rate isn’t always the best deal

Many homebuyers zero their mortgage search on the lowest interest rates, says Goodwin. But the lowest rate doesn’t always translate to the best deal.

“Sometimes a lower rate can be deceiving, but once you compare all of the loan costs and fees apples to apples, it reveals which loan will truly cost more at closing and over the life of the loan,” he says.

Be sure to layer in lender charges, origination fees, and closing costs. Before you close on a mortgage, do a thorough review of the Loan Estimate and the Closing Disclosure, which are both legally-required documents that will outline key terms, provisions, and costs of your loan.

3. The free credit scores you get from third-party sites are likely inflated

Meghan Campbell and her husband are selling their Parker, Colorado home and buying a new one. They were surprised to learn that their credit scores were lower than what was being reported on Credit Karma and other free third-party websites. Even more surprising? About four years ago, an unpaid medical bill went to collections and, despite settling it immediately, it was still showing up on their credit report.

The fix was simple: Campbell called the collection agency, requested it be removed from her credit report since she had paid the remaining balance. The creditor faxed a letter to their lender saying the account was removed and the lender re-calculated her credit score. It went up 20 points.

Ultimately, the couple was able to get a 4.125-percent fixed-rate on a 30-year mortgage, which will save them thousands over the life of their loan as they were originally looking at 5.7-percent interest rate.

NerdWallet’s home expert Holden Lewis recommends getting your official free credit report before you apply for a mortgage. Like Campbell, you can then immediately dispute any errors that you find, potentially securing you a lower interest rate.

4. Your credit score isn’t all that matters when qualifying for a great rate

Yes, a higher credit score can often translate to a better interest rate. But when a lender reviews your credit report, they’re also looking at factors beyond that three-digit number, says Greg Stewart, chief operating officer at Bungalo, a real estate platform for buying newly-renovated homes online.

“Perhaps the most important of all? Debt,” says Stewart. “The number one reason buyers are denied financing is a high debt-to-income ratio (DTI).”

DTI is a finance formula that compares your pre-tax monthly income to your monthly debts, such as car payments or student loans. You can compute it using an online calculator from places like Wells Fargo or Zillow.

“It’s quite possible for a buyer to have a great income and credit score, but too many debt obligations compared to their qualifying income,” Stewart says.

If you’re shopping for a government-backed mortgage, you’ll want to keep your DTI under 43 percent, according to the Consumer Financial Protection Bureau. To get the best rates for a conventional mortgage, you’ll ideally keep your back-end DTI (or all your housing charges and all your monthly debts) under 36 percent.

5. You’ll be on-call to sign documents

Lauren Mochizuki, an ER nurse who blogs about design and budgeting at Casa Mochi, purchased a home in Orange County, California four years ago with her husband. She said she was surprised at how time-demanding the closing process was.

“My husband had to come to my work a few times in order to get my signature for escrow documents,” she says.

She recommends knowing the timelines and deadlines that will help you get to the closing table on time.

Additionally, buying a home requires a lot of paperwork, and sometimes it will seem nonsensical, offers Scott Hastings, a Charlotte, North Carolina-based mortgage lender. For example, when it comes to the mortgage underwriting process, clients will often ask him if they can just send a screenshot of their bank account.

The answer is “nope.”

“The lender must see all pages of the printed bank statement even if some pages are blank,” Hastings says. “If the statement says page seven of eight, and page eight is blank, we’ve got to see that blank page, too.”

When you’re beginning house hunting, you’ll want to gather up documents to have on hand, including W-2s, bank statements, pay stubs, tax returns, investment account statements, and a gift letter if a family member will be helping fund your down payment. But you’re not done there.

6. Closing costs can be expensive

You saved for a down payment. Woot! But did you squirrel money away for closing costs? You’ll want to budget between 2 to 5 percent of the home to cover closing costs, recommends Brian Walsh, Certified Financial Planner, from personal finance company SoFi, which offers home loans.

“Unfortunately, if people forget about closing costs they end up liquidating all of their savings which leaves them unprepared for unexpected expenses and more likely to resort to credit card debt,” he says.

Mochizuki points out that sometimes you can negotiate with the seller to cover at least a portion of the closing costs, but typically the buyer will carry this financial weight. In her own experience, closing costs came in at 2 percent of the home’s purchase price, and the sellers covered half the costs.

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