14 Mistakes To Avoid When Buying a House
February 16, 2024
The process of buying a house is filled with situations that may surprise the parties involved — these are most common mistakes that will have a buyer miss out on their next home.
It's not a surprise that during the home-buying process, emotions run high; stress becomes a major friction point during the transaction.
Beyond the considerations of the parties involved in buying or selling a house, there are some common occurrences that can happen during your real estate.
Let’s go over 7 reasons why a house under contract can fall though, about the Buyer / Borrower from the perspective of the Seller.
Inaccurate Information on Loan Application
Loan Officers (especially, non-reputable Loan Officers) could possibly issue a pre-qualification letter without running the buyer's credit.
Needless to say, this can have major effects on the transaction.
The buyer could have had low credit scores and if the loan officer isn’t knowledgeable enough, they will not properly vet a buyer that talks a good game if he/she was actually qualified.
The Loan Officer isn’t required to tell the Listing Agent the scores, but the loan officer is required to tell the Listing Agent whether or not the Buyer has met the requirements for obtaining a Loan for the House listed.
Understanding Loan Applications
Sometimes, people who help with loans, known as Loan Officers, might give you a pre-qualification letter without checking your credit score.
This is especially true for those who are not very reputable. Obviously, this can lead to big problems.
Why Checking Credit Scores Matters
Imagine you have a low credit score. If your Loan Officer isn't experienced enough, they might not check you out thoroughly.
They might just listen to your confident talk and think you're good for the loan. This can be a problem if you're not actually qualified.
The Role of the Loan Officer
It's important to know that a Loan Officer doesn't have to tell the Listing Agent your credit scores.
However, they do need to tell them if you meet the requirements for a loan. This is crucial when you're trying to buy a house.
Buyer May Have Fabricated Income
Many people have multiple streams of income or hide those streams from Uncle Sam.
It's no secret that people who run businesses, whether they be primary or secondary income, do what they can to prevent having to pay taxes on every single expense.
On the flipside, a buyer could falsely claim to make more in order to seek approval for a higher dollar amount. This is absolutely not advised for anyone that is looking to purchase a home.
Either situation will not be conducive to a real estate transaction.
Understanding Income Issues
Sometimes, people have more than one way of making money. Or, they might not tell the government about all of their income.
This is common for people who own businesses. They try to avoid paying taxes on every little thing they spend money on.
The Risk of Overstating Income
On the other hand, a person might pretend to earn more money than they actually do. They do this to get approved for a bigger loan. But this is not a good idea, especially if you're trying to buy a house.
The Impact on Real Estate Transactions
Both situations can cause problems when you're trying to buy a house. So, it's always best to be honest about your income.
Buyer May Have Opened a New Line of Credit
If a Buyer opens a new line of credit (i.e. credit card / car loan) without understanding the impact, it could serve disastrous for a real estate purchase.
Most people get this distinction confused.
It is easy to buy a car after buying a house; but it is next to impossible to buy a house after you’ve bought a car.
Oftentimes when a bad move like this occurs, it happens before the loan officer was able to counsel the buyer.
The reasons outlined above are the primary reasons why a Buyer would have trouble with the Loan Application during a real estate transaction.
Managing Your Credit
Sometimes, a person might get a new credit card or car loan without realizing how it can affect them.
This can be a big problem when you're trying to buy a house. A lot of people get confused about this.
Buying a Car vs. Buying a House
It's easy to buy a car after you've bought a house. But it's really hard to buy a house after you've bought a car.
The Role of the Loan Officer
Often, people make this mistake before they get advice from their Loan Officer.
Why Loan Applications Can Be Tricky
These are the main reasons why someone might have trouble with their loan application when they're trying to buy a house.
Buyer May Not Have Filed Taxes and/or Owe Back Taxes
There may be 1 million different reasons why a person may have not filed her taxes. But no matter your reasoning, it's going to be an important factor in the decision for a buyer.
When employed, most lenders only require for a year's worth of taxes. For the self-employed, lenders would require two years of tax returns.
Filing accurately without an outstanding balance is essential for being approved for a mortgage loan, keep it in mind if you are considering the purchase of a new home.
Understanding Taxes and Loans
There could be a million reasons why someone hasn't filed their taxes. But, no matter the reason, it's really important when you're trying to buy a house.
Tax Requirements for Employed and Self-Employed
If you have a job, most lenders just need to see your taxes for one year. But if you work for yourself, they'll need to see two years of tax returns.
The Importance of Paying Your Taxes
It's really important to file your taxes correctly and pay what you owe. This is a big part of getting approved for a home loan. So, keep this in mind if you're thinking about buying a new house.
Submits Incorrect Information to the Lender
There is a common term we as Realtors use all the time….”buyers are liars.” It's not a knock at them, people lie. It's a human thing.
Sometimes it's completely accidental; I've seen it happen.
However, this becomes a major problem when you're attempting to buy a house.
Buyers, unfortunately, submit false or inaccurate employment documentation. This could be the case for a number of reasons.
Maybe there was a recent layoff or wage cut that could affect the buyer’s loan approval, or there was a mistake in translation between reality to paperwork.
The Problem with Wrong Information
In the world of real estate, there's a saying: "buyers are liars." It doesn't mean all buyers are bad, people just sometimes tell lies. It's a human thing.
Accidental or Not
Sometimes, people give wrong information by accident. I've seen it happen. But it can be a big problem when you're trying to buy a house.
Why Buyers Might Give Wrong Information
There are many reasons why a buyer might give false or wrong information about their job. Maybe they've recently lost their job or had their pay cut.
This could affect their loan approval. Or maybe there was a mistake when they were filling out the paperwork.
Buyer Has a Very Short Employment History
When buying a house, it's pretty important (to the Lenders) that you have a job. Preferably, one that you've had for a while that pays well.
This consideration goes double in the case of a married couple looking to purchase a home.
Oftentimes, buyers could purchase as a married couple where one spouse's income is sufficient but needs the credit from the other spouse in order to qualify for loan approval.
As a good listing agent, when speaking to the loan officer about the buyer's capabilities, it is important to inquire if the loan officer has confirmed the legitimacy of the documentation submitted for a pre approval.
The Importance of Job History
When you're trying to buy a house, having a job is really important. Lenders like it when you've had your job for a while and it pays well.
Buying a House as a Married Couple
This is even more important if you're a married couple trying to buy a house. Sometimes, one person makes enough money, but they need the other person's good credit to get approved for the loan.
Checking the Buyer's Information
If you're a real estate agent, it's important to check with the loan officer. You need to make sure they've checked that the buyer's paperwork is all correct and real.
Buyer is a Veteran with Dishonorable Discharge
In the case of a U.S. Veteran looking to purchase a home with a VA loan, the buyer could not have submitted proper discharge papers (Form DD 214) or any other document that proves VA eligibility.
The buyer won’t qualify for a VA loan if dishonorably discharged.
It takes a couple of VA loans to understand the timing for VA loan approval.
The typical timeframe is 45 days and that’s mostly due to the military related documentation that is required for a bar to qualify for VA funding.
Loan officers would ask the buyer for most of the VA related documentation and the buyer (if they don’t currently possess that documents) would have to contact their local VA office and wait for that information to be sent to them, that process could take longer than expected.
Veterans and Home Loans
If you're a U.S. Veteran and you want to buy a house with a VA loan, there are some things you need to know.
The Importance of Discharge Papers
First, you need to have the right paperwork. This includes your discharge papers (Form DD 214) and any other documents that show you're eligible for a VA loan.
If you were dishonorably discharged, you won't be able to get a VA loan.
Understanding the VA Loan Process
Getting a VA loan can take some time. Usually, it takes about 45 days. This is because of all the military-related paperwork that's needed.
Getting the Right Documents
The loan officer will ask you for all the VA-related documents. If you don't have these, you'll need to contact your local VA office.
They'll send you the documents, but this can take longer than you might expect.
Buyer Submitted Incorrect Tax Forms
Most lenders would require credible rental history as part of the approval process because it gives a good indication on the buyer's ability to pay their mortgage.
If, for some reason, the buyer were not able to produce proper documentation, it would be for one of the following reasons.
Buyer could have falsified various tax forms, to cover-up a delinquency or to purposely omit earnings.
Buyer could have possibly missed filing a year and simply forgot.
Buyer could have inaccurately filed taxes and didn’t realize the impact it would in the future.
Buyer could have submitted false business earnings (tax docs).
Buyer could have falsified bank statements (openly committing loan or mortgage fraud).
The only reason why buyers with falsify bank statements is to possibly get approved for a higher purchase price.
No matter the cause, it is important to ensure proper information is recorded the first time.
Recent Late Payments on Credit Report
If this is the case, chances are, the buyer’s credit is borderline in the first place and may not have been qualified to buy.
Late payments may not affect the scores too much but that will be determined by the lender.
Experian states, "Because your late payments happened in the past year, you may find that lenders offer you higher mortgage interest rates, which will in turn increase your monthly payments. That higher interest rate could cost you thousands of dollars over the life of the loan."
In this situation, accepting an offer from a buyer that is using a reputable lender is key.
Good loan officers work for reputable lenders and they are brutally honest, ergo if a buyer is on the cusp, the loan officer would not attempt to start the loan process for the buyer until the buyer can raise his/her scores.
Late Payments and Credit Scores
If you've recently made late payments, it could affect your credit score. This might make it harder for you to buy a house.
How Late Payments Affect Your Credit
Late payments might not hurt your credit score too much, but it really depends on the lender. If your credit is already borderline, late payments could make things worse.
Working with a Good Lender
In this situation, it's really important to work with a good lender. Good loan officers are honest and work for reputable lenders.
Improving Your Credit Score
If your credit score is just barely good enough, a good loan officer won't start the loan process. Instead, they'll wait until you can improve your credit score.
Additional Debt Found After Loan Application
Some lenders give pre-qual letters to buyers without fully assessing the buyer’s ability to purchase. A pre-qualification or pre approval letter is required when making an offer on a home.
A borrower needs to disclose all of their monthly expenses so the loan officer can accurately determine what their purchasing power is. If anything is left out, it will throw off the entire approval process.
Understanding Home Loans
When you're trying to buy a house, you need to understand how loans work. This includes understanding the terms pre-qualification and pre-approval.
Pre-Qualification vs Pre-Approval
A pre-qualification or pre-approval letter is something you need when you make an offer on a house. The difference between the two is how much information the loan officer has checked.
How Lenders Decide If You Can Pay a Mortgage
Lenders use something called a front to back ratio to see if you can afford to pay a mortgage every month.
The Front Ratio
The front ratio is all your housing costs like rent, water, and electric. These shouldn't be more than 28% of what you make every month.
The Back Ratio
The back ratio is your housing costs plus any other debts you have. Things like car payments, credit cards, and child support.
These shouldn't be more than 36% of what you make every month.
Why You Need to Tell the Lender Everything
You need to tell the lender about all your monthly expenses. This helps them figure out how much you can afford to spend on a house.
If you leave anything out, it could mess up the whole loan approval process.
Borrower Loses Job
Anything could happen. An unfortunate circumstance to consider is that the buyer loses their job while under contract; compensation for the time passed is still owed to the seller.
A borrower or co-borrower losing their source of income virtually kills the transaction, sometimes even if the borrower regains employment with another company.
There are very few circumstances that can result in a refund of the due diligence and unfortunately, losing a job isn’t one of them.
In the event that the buyer loses his job, It is imperative that the buyer communicates their misfortune before the expiration of due diligence in order to save their earnest money deposit from being fortified.
Interest Rate Increases
Interest is the fee a mortgage lender charges a borrower for the loan. The interest rate plays a significant part because it greatly impacts the monthly mortgage amount.
A mortgage payment consists of principle, interest, taxes and insurance.
The Fed rates change almost daily. Interest rates can change simply by supply and demand of credit. An increase of the demand for money or credit will raise interest rates.
If interest rates rise, then the mortgage payment will also rise.
If the mortgage payment was near the buyers affordability limit before the rates increased, then the buyer would have to entertain getting a much lower loan amount and using cash to make up the difference to meet the contracted purchase price.
Buyer Gift Money Missing Paper Trail
Sometimes, when you're buying a house, you might get a "gift" to help pay for it. But there are some rules about this.
What is a Gift?
A gift is money that someone else gives you to help buy a house. This person needs to be an approved family member, and the lender needs to know about this relationship.
Rules About Gift Money
The lender needs to make sure the gift money isn't "mattress money" or from any illegal activities.
If you or the person giving the gift don't have proof of where the money came from, you won't be able to get the loan.
When Lenders Ask for Proof
Here's the tricky part. Lenders usually don't ask for proof of gift money until near the end of the loan process. So, you need to make sure you have this proof ready when they ask for it.
Buyer is Short on Funds at Closing
Buyer could have spent money needed for down payment and closing costs and comes up short at closing.
This is common with first time homebuyers not understanding what’s necessary in the purchase.
It is earnest of the buyers agent and the lender collectively to make sure that the buyer understands the importance of being conservative with spending and aggressive with saving.
Within that time period, the buyer will need to prepare the funds necessary for closing.The loan officer should have already given the buyer a ballpark figure of what the buyer would need “cash to close” several weeks before closing.
Final Thoughts from Tim
I've learned a lot over the years, and I want to share some advice with you to make your home buying experience as smooth as possible.
First, always be open and honest about your financial situation. This includes your income, your debts, and any gift money you might be using.
The more information your lender has, the better they can help you.
Second, work with a reputable lender. They'll guide you through the loan process, making sure you understand each step.
Remember, a good lender wants to help you get a loan you can afford.
Finally, don't rush. Buying a house is a big decision, and it's important to take your time.
Make sure you're comfortable with the house, the loan, and the terms before you sign anything.
I hope this advice helps you on your home buying journey. Remember, the most important thing is to find a house you love and can afford. Happy house hunting!
What's the difference between pre-qualification and pre-approval?
Pre-qualification is an initial evaluation of your creditworthiness, based on information you provide. Pre-approval is a more thorough process where the lender checks your credit and verifies your financial and employment information.
How does a lender decide if I can afford a mortgage?
Lenders use a method called the front to back ratio. They look at your income and your expenses to see if you can afford to pay a mortgage every month.
What is the front to back ratio?
The front ratio is your housing costs as a percentage of your income. The back ratio is your housing costs plus any other debts as a percentage of your income.
What counts as a housing expense in the front ratio?
Housing expenses include things like rent, water, and electric bills.
What debts are included in the back ratio?
The back ratio includes housing expenses plus any other debts you have, like car payments, credit cards, and child support.
Why do I need to tell the lender about all my monthly expenses?
Telling the lender about all your expenses helps them figure out how much you can afford to spend on a house.
What happens if I leave out some of my expenses?
If you leave out any expenses, it could mess up the loan approval process.
Can I use gift money to buy a house?
Yes, you can use gift money to buy a house, but there are some rules about this. The person giving the gift needs to be an approved family member, and the lender needs to know about this relationship.
Who can give me gift money for a house?
Gift money for a house usually needs to come from an approved family member.
What kind of proof do I need for gift money?
You need to have proof of where the gift money came from. If there's no proof, you might not be able to get the loan.
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