Story Time: 3 Big Mistakes My Clients Made Before Buying Their First Home
You'll probably make at least one before we're done...
Buying a home is not like buying a pack of gum at the gas station, it’s a serious process. Sometimes a long process, and often a stressful one. However, it really can (and should!) be fun and exciting.
The following stories are based on real events, and they’re presented here so YOU can learn from the mistakes without making them. The names have been changed to protect the innocent, but by keeping these stories in mind as you start your process, you will turn the process of buying your home into the fun experience that it should be.
So buckle up because it’s storytime!
Waiting to get your Pre-Approval.
One morning at the office I got a frantic call from a woman I’d never spoken to before.
“How quickly can I get Approved for a Mortgage?” she said.
“Usually it takes me a few hours from when you get your income documents to me,” I said, and I gave her my email.
About 20 minutes later, I had everything I needed from her and got the Pre-Approval letter to her shortly thereafter. She wrote an offer that day, got it accepted, and then bought the house.
Success story right? Well, yes it was a success but it was MUCH more stressful for her than it needed to be!
All of that stress was self-imposed, simply because she didn’t get a Pre-Approval early in the process.
As the story turned out, she had been working with a Real Estate Agent but hadn’t gotten a mortgage Pre-Approval (despite the Agent basically BEGGING her…), and then suddenly the right house showed up: location, price, bedrooms were just right and she wanted to put in an offer.
The Sellers were only accepting offers until that evening, and just like all offers, they’d want to see a mortgage Pre-Approval Letter. Luckily for her, I work quickly and we were able to get her Approved, but again she was frantic over something we could and should have completed on day 1 of house shopping.
Plus, she spent weeks looking at houses with only a guess for the payment or whether she really could afford to buy the house she wanted.
The Fix #1
Say you’re in the market for a new home. You’ve looked at a few homes online and are ready to take a few tours with your Real Estate agent. At this point,
Getting Pre-Approved is the #1 item on your list.
This process may take some time and you NEED to be Pre-Approved before making an offer to the seller.
Renting For Too Long (aka Never Compromising on the "Dream Home")
No one wants to compromise when buying a home, but the long-term costs of renting rather than buying are sneaky and usually even more expensive than making a compromise. Sometimes NOT buying something that’s less than perfect might actually make buying that perfect home harder to achieve in the future.
A former colleague had a friend who was renting a fantastic condo by the beach when he was single. This was in the early 2000s (older colleague…), and the rent was cheap: “why buy a house when I can stay here for the same monthly payment as buying, and no down payment?” he thought. Truthfully, the “Dream Home” he really wanted wasn’t affordable (he made decent money but didn’t have the down payment) so he kept renting.
Pretty shortly thereafter he got married. Because his condo was in a better location than her place, his wife moved in with him. The landlord raised the rent, but with her additional income the rent was still affordable and the new couple enjoyed their beach condo life. Again, they probably could have found something to buy, but they were newlyweds living at the beach! So they kept renting.
Well, as happens with many young married couples living together, pretty soon she was pregnant and again they had a decision: keep renting a house that their family was starting to outgrow, or buy a house they could afford and give up the beach life. Since they were now making more money, they could probably have bought a nice little starter house or condo, but again the “Dream House” a 3 bedroom 2 bath near the beach, was still more than they could afford.
That nice starter home would mean giving up the beach life! So, again, they decided that rather than buying, they’d rent a larger condo by the beach. Again, the rent went up, but they couldn’t afford to buy the “Dream Home” so they rented it, meanwhile, that dream was actually getting more expensive and larger as their housing needs changed…
Flash forward 10 years: they’d since had 2 more children with another on the way (4 total!) and the friend approached my former colleague: “I want to buy a house and I need to have at least 4 bedrooms” he said, “and probably will need 5 bedrooms. The rent on something like that, in the area where my kids go to school, is going to bankrupt me. What can I do?”
Our beach-life friend was in a tough situation: by never compromising on the “Dream Home” to buy something he could afford, he’d ended up renting for too long. While he rented, his rent went up, and the prices of homes around him went up as well, pushing his dream further from reality. And to make things worse, his family kept growing so he needed a larger house as time went on. All that rent and he wasn’t building equity with his monthly payments the way he would with a mortgage, so he didn’t have that equity available to buy the “Dream Home” as his housing requirements grew.
As we all know, rent basically goes up over time, but your mortgage payment on a fixed rate mortgage does not. So our beach-life friend was now actually paying MORE in rent than what he would have been paying for a fixed rate mortgage. By the time I heard this story, the down payment needed to get a monthly mortgage payment that he could afford was going to be over $100,000, which was simply too much for him to save while supporting his family.
So, what did he do? Well, I actually never found out: I didn’t get the end of the story from my colleague before he moved on.
The Fix #2
What should you do to avoid renting forever?
Make a list of your priorities with your new home, and recognize that you will not be able to get them all when you start shopping: you will probably need to make sacrifices now so that you can get more of what you want when you upgrade later.
Recognize that even though a mortgage payment is almost certainly going to be more money than your rent is each month now, that’s just the “teaser” rental rate because we all know that the rent will be going up over time.
Financing Anything Before You Close (yes, anything.)
A new client at the time (I have worked with him several times since this story) was buying his first home.
As I always do at the beginning of the loan process I reminded him to NOT finance anything unless he spoke to me first, and he agreed.
Sometimes, it will make sense to finance furniture or appliances for a new home but you need to make sure and clear it with me, your Mortgage Professional, because if that new couch or refrigerator affects your debt too much and pushes you out of qualification for the loan, you might not have a house to put it in.
Now back to my client: the loan process was going smoothly and we were ready to close. Hooray! He and his wife signed loan documents on Thursday and the close of escrow was the following Wednesday, so basically 4 business days. I spoke to him Friday when he made the wire transfer to escrow to close the loan, and I planned to speak with him the following week. Everything was all good!
So, you may not know this, but usually 1 or 2 days before your loan actually funds the Underwriter will request a “soft pull” credit report. The main reason for this is to make sure that you haven’t gotten another mortgage at the same time (2 mortgages on the same house would be an issue…) and that you haven’t gotten any new debts. Either case can mean that you can’t pay your mortgage, so it’s important that the Underwriter checks before the loan is funded.
So, Monday morning I got a call from the Underwriter:
“Hi Chris, so we just looked at Mr. Client’s soft pull and there is a BMW FINANCIAL line item there that looks like it was just opened. Do you know anything about that?”
My heart sank; I felt sick. A $900, yes NINE-HUNDRED DOLLAR car payment that my client had just got days before closing on his new house. The Underwriter went on: he didn’t qualify with the new debt. Something would need to be done or he’d lose the house.
I collected myself and called my client: “So, I heard you got a new car. Well, I hope you didn’t put too many miles on it, because unless you’re planning on living in it, it has to go back!”
He was disappointed, but he remembered what I said and he understood. Ultimately, he was able to return the car and the dealer was understanding. Although it cost my client a few thousand dollars to have them take it back, it was a lot cheaper and less painful than telling his wife that they would be sleeping in the car instead of the house…
The Fix #3
Wait Until You Own the House Before You Finance Anything Else!
Or, buy whatever you want, as long as you plan to live in it…
Thanks for reading and I hope you’ll be back for the next Story Time!
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I founded California’s Best Lenders to bring the best of Wholesale Mortgage Lending to as many people as possible. In nearly a decade of helping people of all backgrounds and walks of life achieve their dream of home ownership, I love sharing my expertise and experience.