What Not to Do Before Buying a House: 7 Mistakes to Avoid
Set Yourself Up for Home Buying Success
In today’s competitive housing market, buyers need strategic planning to secure their desired home. By adhering to best practices while house hunting and applying for a mortgage, you can significantly enhance your chances of success. Knowing what to expect and avoiding common home-buying mistakes is crucial for landing your dream home.
Mistakes Can Cost You When Buying a House
When preparing to get a mortgage and purchase a new home, it's essential to tidy up your personal finances and present yourself as a strong borrowing candidate. This involves more than just saving for a down payment and closing costs; avoiding common financial missteps can prevent reduced borrowing power or even mortgage denial.
“Most buyers are preoccupied with saving for a down payment and getting their foot in the door, forgetting about details that can trip them up, like a low credit score and paying down their debt,” says Michele Harrington, COO of First Team Real Estate.
7 Things You Should Never Do Before Buying a House
Don’t Finance a Car or Another Big Item Before Buying
Jim Roberts, president of True North Mortgage, emphasizes that financing a car or purchasing big-ticket items on credit before applying for a mortgage can be detrimental. “Lenders perform a final credit inquiry before closing, and any new debts could jeopardize loan approval,” Roberts explains. Taking out a loan or financing a large purchase increases your debt-to-income ratio (DTI), making you less attractive to lenders. Harrington advises, “Avoid big purchases or financing a new car for six months to a year before purchasing a home.”
Don’t Max Out Credit Card Debt
Maxing out credit cards is a significant mistake before closing on a home loan. It increases your DTI and lowers your credit score, resulting in higher loan costs. Roberts notes that what matters is your debt relative to your credit limits. Keeping credit utilization below 30% of your total credit limit is ideal. For instance, if your limit is $3,000, maintain a balance below $900 and pay off the card in full each month to improve your credit score and qualify for better loan terms.
Don’t Assume You Need 20% Down
Many first-time buyers think they need a 20% down payment, but this isn’t always necessary. While a 20% down payment helps avoid private mortgage insurance (PMI), waiting to save this amount can delay your home purchase and increase the amount needed due to rising home prices. Various loan programs require little to no down payment, such as:
0% down VA loans for qualified military/veteran borrowers
0% down USDA loans for select rural and suburban areas
3.5% down FHA loans
5-10% down conventional mortgages
“Some conventional loans require as little as 3% down if you pay mortgage insurance,” says Harrington. Mortgage insurance premiums are more affordable today for borrowers with good credit.
Don’t Quit Your Job or Change Careers Before Buying
Consistent employment is crucial when applying for a mortgage. Job changes can complicate lending, especially if your pay structure changes from salary to commission, requiring a longer earnings history. “Maintain a consistent employment history of at least two years at the same employer or in the same line of work,” advises Roberts. Switching jobs within the same field typically doesn’t raise red flags, but changing industries can require a new two-year work history before qualifying for a loan.
Don’t Shop for Houses Without Getting Preapproved
Getting a mortgage preapproval before house hunting is essential to avoid disappointment. Sellers often require preapproval letters to show their homes to serious buyers. Additionally, preapproval helps you understand your true price range by verifying your income, credit history, and assets.
Don’t Go with the First Mortgage Lender You Talk To
Shopping around for a mortgage is crucial. Different lenders offer varying rates and terms, and your longtime bank may not provide the best deal. Compare personalized rate quotes from at least 3-5 lenders, including online mortgage lenders, credit unions, and mortgage brokers.
Don’t Make Any Big Financial Changes Before Closing
Avoid major financial changes after receiving a mortgage preapproval and before closing. This includes purchasing cars, significantly increasing credit card balances, opening new credit cards, changing careers, or applying for new loans. These actions can alter your DTI and creditworthiness, risking your loan approval.
Best Practices When Buying a House
To improve your odds of mortgage approval and securing a lower interest rate, practice financial prudence in the months leading up to your home loan application:
Do not close any active credit accounts.
Avoid applying for or opening new credit accounts.
Keep credit balances below 30% of your credit limit.
Save as much cash as possible for your down payment and closing costs, typically 2-5% of the loan amount.
Track large deposits to your bank accounts and be prepared to document their sources.
Review your credit reports for errors or inconsistencies and work to correct them.
Recap: What Not to Do Before Buying a House
To summarize, avoid these seven mistakes before buying a home:
Taking out a car loan or financing other big items
Maxing out your credit cards
Assuming you need 20% down
Quitting or changing jobs to a new field
House hunting without getting preapproved
Using the first mortgage lender you talk to
Making big financial changes before closing
By steering clear of these pitfalls and keeping your finances in top shape, you’ll be well on your way to successful homeownership.