Harmony Realty Triangle
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steps to buying a home

1. Not Getting Approved For Their Loan

Preapproved

VS

Prequalified

Prequalification

There are two types of proof of financing you can get from a lender: a pre-qualification letter or a pre-approval letter. I always recommend the pre-approval letter. 

Being prequalified for a loan means you have spoken with a lender, disclosed your income and debts, and the lender has made an estimate of loan qualification based on your word. No person has objectively reviewed the information or credit report.


Preapproval

In a pre-approval, the borrower fills out a mortgage application & supplies the lender with initial documentation. the lender performs an extensive check on the buyer's financial background and credit rating. The lender's approval is then given based on their professional opinion of whether the underwriter will approve the loan.


Some lenders are even offering a quick underwriting process in addition to pre-approval. In this case, the underwriter actually looks at your application and gives her approval. The only time this would be overturned is if there was information that came to light after the application process.

A pre-approval is a much more accurate instrument to determine whether you will actually be approved for the loan. The approval process isn’t like a credit card application, where you tell them your income and they pull your credit and make a decision. Every piece of your application must be verified. If you say you have funds in your bank account, the underwriter is going to want to see a bank statement proving those funds exist. Your employment and salary will be verified. If your mom gave you money for a down payment, they will want to see proof that the funds will not need to be paid back.

How It Can Cost You Money

A pre-qualification is a much less reliable proof of a buyer’s ability to purchase a home. But many buyers don’t realize that as soon as you make an offer on a home and that offer is accepted, they will start spending money. It is not in their best interests to spend money with an unreliable approval.

The Due Diligence Period is a limited time frame (usually 2 - 3 weeks) in which you have the right to inspect the property for anything that may cause you to terminate the contract, such as extensive termite damage. During this time period, you have the right to terminate the contract and have your Earnest Money Deposit refunded. But the lender will likely need all of the Due Diligence Period (and possibly longer, depending on how complicated your finances are) to complete your loan approval. What is not refundable, is your Due Diligence Deposit and the cost of all your inspections.

If you don’t get your loan pre-approved, you are at much greater risk for losing all the money you put into due diligence: inspections, appraisal, survey, and deposits. On the low side this could be $2000-$3000 or as much as $10,000 or more. 

It’s not worth the risk. Before you start even looking at houses, it’s best to take the time to complete the full application and provide as much documentation as possible to get the most accurate pre-approval available. 

One other failure to get a pre-approval can cost you money is this:, the seller, if he has a good Realtor,™ also knows that a pre-qualification isn’t worth much.

Let’s say you make an offer on a home with only a pre-qualification letter. The seller may see that and, at the advice of his agent, ask for a higher deposit because of the greater risk to him. No one wants to take their home off the market for a month, pack up all their things and possibly even move out of the house, and then find that the buyer’s loan fell through. A higher deposit would protect the seller if that should happen.

2. Not Getting A Survey

How It Can Cost You Money

A typical survey of a subdivision lot costs about $400. In the grand scheme of house-buying, it isn’t that much money. But when all the little things start to add up, the home inspection, pest inspection, radon test, etc, etc, etc. It seems like the survey is the first one buyers want to get rid of because, hey, the seller shared the survey from when they bought the house and what could possibly have happened since then?

A lot.

Imagine this: You have a contract on a home to purchase. The seller bought the house brand new and the builder did a survey at that time. Then 7 years later, the seller decides to sell and still has his survey so he shares it with you. 6 years ago, the seller hired a contractor to build a new 2 car detached garage as well as a driveway running back to it at the rear of the home. He hires his brother, Bob, who is pursuing his contracting licensure and has many years experience building. Bob builds a garage that looks beautiful and it is your favorite feature of the house.

Bob, however, does not get a survey, Instead he looks at an arial map, taken around the time the house was built. He believes the property line to be where the neighbors current fence is, but in actuality it is at the line of bushes he digs up to install the driveway. Those things weren't there when the arial photo was taken. Your agent recommends you get a survey, but you’re running out of money and decide to skimp on it. You really want to save some cash for the new furniture you will need when you move in.

You close on the house.

Six months later, your new neighbor puts his house on the market. After a short while, it goes under contract and, you probably guessed it, the buyer decides to do a survey. Unfortunately, your garage and nice long driveway are encroaching on the neighbor’s property. Cost to remediate: $20,000

3. Financing Furniture Before Closing

Financing Furniture Before Closing

The danger in buying new furniture is that it could reverse your loan approval or send your loan back to underwriting.

Here's how it happens


Your loan approval is a process. Your credit is being continuously monitored by the lender during the approval period (that’s up until closing!) to ensure that nothing changes on your credit to make you less credit-worthy.

That could be as complicated as a judgement showing up on your credit report for child support you didn’t pay last month. Or as simple as purchasing new furniture the week before closing to be delivered as soon as you close.

things buyers do that cost them money


How It Can Cost You Money

One of the conditions of loan approval is an approved debt-to-income ratio. That means that the debts you owe (monthly payments) does not exceed a particular percentage of your income. The percentage is different based on what type of loan you are using and your financial history. 

Purchasing furniture during the contract period means your loan package would have to go back to the underwriter so she can decide whether you still qualify for the loan with the additional debt. Best case scenario, you're still qualified, the underwriter isn't backed up and can get to your file right away. But if you don't have enough income to be approved, your loan would be denied. Even if this happens 3 days before closing.

Not only have you lost the house, but you've lost all the money you paid for inspections, appraisal, survey plus your Due Diligence Deposit and your Earnest Money Deposit! And of course, your furniture is already on the moving truck and you've already moved out of your home. There is no easy ending to this scenario.

Even if the loan isn't denied because of the increased debt, there is still a small possibility that you could lose the house anyway.

Say this does happen just 1 day before closing. You were scheduled to close on time, but now your loan has to go back through the underwriting process. The underwriter might have 5 other loans sitting on her desk in situations similar to yours...all rush jobs. So you have to wait. And it takes an extra week. Which would be fine because the contract has a 14 day grace period for closing just for situations like this. However, there are literally dozens of reasons closings get delayed. And in this hypothetical scenario, your closing had already been delayed once because when you did your final walk-through, you noticed one of the repairs had not been done correctly. Between both delays, you are past the 14 day grace period. Your seller, who has a backup offer from another buyer for more money (this is a very hot market!) has decided that since you are now in breech of contract, he will exercise his right to terminate your contract and accept the other offer. 

4. Choosing the Wrong Lender

How the Wrong Lender Can Cost You Money

The Lender Was Wrong About His Pre-approval

Sometimes lenders that have too many transactions and not enough administrative help are not as careful in looking at the details for the pre-approval. If they are wrong about their pre-approval, it really only hurts the buyer and seller. The lender doesn't have any financial loss if they make a mistake This is why I recommend using reviews and recommendations when selecting a lender. A lender that cares about his reputation is going to be much more detail oriented when making a statement of pre-approval. 

The costs for this mistake is the same as any time the contract is terminated: Loss of fees and expenses associated with buying the home.

The Lender Was Negligent in Managing the Transaction

Lenders who are in over their heads or even who just aren't good at managing transactions or delegating, can easily miss important steps and cause the closing to be delayed. The times I have experienced lenders that delayed closings, they usually missed emails and didn't respond in a timely fashion to requests from the underwriter for more information.

When the closing is delayed, the cost is usually in the form of extra moving expenses, storage fees, extra days in a hotel or rental property.

More...

5. Thinking a Realtor's Value is in Opening Doors

Thinking a Realtor's Value is in Opening Doors

  • There is a general feeling mistrust in the real estate industry. Bully tactics that some agents use to gain clients and close deals has many people feeling like their agent's advice is just a strategy to close the deal and get their paycheck.

    I get it. I've been on the receiving end of it!.

    Many people believe that all agents are created equal and so they choose the first one to cross their path. And then they don't value the advice she gives.

    It's always best to do your homework when hiring a Realtor.™ Once you've determined she knows her stuff, listen to her opinion. A good agent will not try to make decisions for you, but she will make sure you know enough to make good decisions about your purchase. There are literally hundreds of things that can go wrong in a real estate transaction. It takes a lot of time and experience to begin to understand the many things that can happen and how it can affect the client. 

    Most home buyers and sellers will only sell 3-5 homes in their lifetime. Those experiences simply aren't enough to protect them against things they can unknowingly do that could cost them a small fortune. Using your agent as a consultant, rather than just a door opener will give you the best outcome. Ask good questions. Consider her answers. Then decide what you want to do.

How it Can Cost You Money

  • The best way to see how not trusting a Realtor™ can cost you money is to share a couple of stories.
  • NOT TRUSTING YOUR AGENTS JUDGEMENT ON NEGOTIATIONS - Your agent knows that there are many different points of negotiations in a contract. All these points, including repair negotiations, need to be balanced to get the best outcome. For example, if you ask for cosmetic repairs during the repair negotiation (or too many negligible repairs in general), a seller is often less willing to negotiate repairs at all, especially if you have a lot of due diligence money at stake. The seller knows that if you back out, it will cost you all the money you have into the transaction. If they perceive that you are being unreasonable, it can bring negotiations to a halt. 

    Understanding how much leverage each party has in the negotiation and using that leverage effectively is much easier for an objective person like your agent. 
  • NOT TRUSTING YOUR AGENTS LENDER RECOMMENDATIONS - We've talked quite a bit about this one already. Getting a reputable lender is incredibly important. Your agent works with lenders every day and knows which ones are trustworthy. Agents only recommend lenders because they want the transaction to proceed smoothly. We never take referral fees for those recommendations -- it's illegal.
  • NOT TRUSTING YOUR AGENT W/ CONTRACT RECOMMENDATIONS - I once had a client who had lost a home negotiation due to competing offers. The next house we made an offer on, she decided to put down a HUGE due diligence deposit. This deposit is always non-refundable and I knew the appraisal was likely to come in too low. And it did come in very low. Fortunately, the seller had a listing agent who wasn't a great negotiator and I was able to get the price down to the appraised value. But if that list agent realized we would lose $15k if my buyer walked, my buyer probably would have had to pay the difference between the contract price and the appraisal. 

Conclusion

  • While some of these scenarios might seem a bit far fetched, if you ask any Realtor™ they will tell you that working in real estate is not for the faint of heart. These types of scenarios can and do happen every single day.

    Our goal at Harmony is to make sure you have the tools and information you need to protect yourself from the many potential pitfalls that come with buying a home.

 

See more buyer $$ tips here:

I Found a Home, How Much Money Do I offer? by Lynn Pineda

Tips for Preparing to Get a Mortgage by Kyle Hiscock

Home Inspection Repair Requests a Buyer Shouldn’t Make by Bill Gassett

Ready to search for your new home? Search Wake County Real Estate here.

 

About the Author Ellen Pitts

Ellen is the founder of Harmony Realty, a socially conscious realty company. Ellen believes in empowering her clients through education and open communication. Ellen is a number-cruncher at heart and takes great pleasure in following and analyzing the trends of the housing industry. She loves communicating the big picture to her clients and helping them to understand how the market affects their sale or purchase. Her honest and down-to-earth approach allows her clients to make informed and intelligent decisions to get the most out of their offers and negotiations.

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