Most common mistakes in buying a home

Buying a home | Refinancing your home | Getting a home-equity loan

If you're like most people, purchasing a home is the biggest investment you'll ever make. If you're considering buying a home, you're likely aware of the complexity of the endeavor. Because of the numerous factors to consider when purchasing a home, it's important to prepare as best you can. Some common home-buying principles are presented here for your consideration. By keeping them in mind, you'll help create a successful and more enjoyable experience. Since the purchase of your home could cost up to 50% of your gross income, it’s important that you do the proper research necessary.

How will I know how much I can afford?

Normally a buyer will be able to purchase a home worth up to two to three times their gross monthly income.  Although that number will vary in accordance with your credit history, current liquid assets and cash, and also the amount of down payment that you’re going to make.  Feel free to give us a call at (877) HARBOUR or locally at (843)341-1247 and we’ll be able to determine this amount for you within a short time frame. 

Buying a home

1. Looking for a home without being pre-approved. As a potential buyer competing for a property, you'll have a better chance of getting your offer accepted by being as prepared as possible. Consider this hierarchy of preparedness:
• Neither pre-qualified nor pre-approved
• Pre-qualified
• Pre-approved

Neither pre-qualified nor pre-approved

These buyers provide no evidence that they may be able to afford your property.  Which could leave the seller wondering just how serious they are about buying.

Pre-qualified

This is the first step a buyer can take to obtaining documentation from a lender.  The lender at this stage will have spoken to the bank regarding their income, expenses, liabilities and assets.  We’ll then provide you with a letter stating our opinion of what you could afford to purchase.

Pre-approved

This buyer has provided the bank with evidence of income, expenses, assets, liabilities and credit. All information has been verified by Harbourside Community Bank. As a result, much of the paperwork for this buyer's loan will have been completed. This buyer will probably be able to close quickly.  We’ll then provide you with a letter (pre-approval certificate) from the bank.

As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.

2. Not receiving a Good Faith Estimate.Within three business days after the Bank receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE.

3. Not getting a rate lock in writing.  When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and program details.

4. Buying a home without professional inspections.Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them.
   
   If the seller agrees to make repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything was done as promised.
5. Not shopping for home insurance until you are ready to close. Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and do not have time to shop around.
6. Signing documents without reading them. Whenever possible, review in advance the documents you'll be signing. (Even though some specifics of your transaction may not be known early in the transaction,  the documents you'll sign are standard forms and are available for review.)  It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.

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Refinancing your home

1. Refinancing with your existing lender without shopping around. Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender  will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.
2. Not doing a break-even analysis.  Determine the total cost of the transaction, then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even. Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In this case you'd refinance if you planned to stay in your home for at least 40 months.
   
   Note:  This is a simplified break-even analysis. If you are refinancing considering switching from an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.
3. Paying for an appraisal when you think your home value may be too low. Have the appraisal company prepare a desk review appraisal (typically at no charge) to provide you with a range of possible values. Your mortgage company's appraiser may do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your home.
4. Using the county tax-assessor's value as the market value of your home. Mortgage companies do not use the county tax-assessor's value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.
5. Signing your loan documents without reviewing them. See item number nine above.
6. Not providing documents to your mortgage company in a timely manner.  When your mortgage company asks you for additional documents, provide them immediately. They are doing what's necessary to get your loan approved and closed. Delays in providing documents can result in pushing back the closing date which may prove costly.
7. Not getting a rate lock in writing.  When a mortgage company tells you they have locked your rate, get a written statement which includes the interest rate, the length of the rate lock and details about the program.

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Getting a home-equity loan/line

1. Getting too large a credit line. When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit--not the used credit. Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans.
2. Not understanding the difference between an equity loan and an equity line. An equity loan is closed--i.e., you get all your money up front and make fixed payments until it is paid if full. An equity line is open--i.e., you can get numerous advances for various amounts as you desire. Most equity lines are accessed through a checkbook or a credit card. For both equity loans and lines, you can only be charged interest on the outstanding principal balance.
   
   Use an equity loan when you need all the money up front--e.g., for home improvements, debt consolidation, etc. Use an equity line when you have a periodic need for money, or need the money for a future event--e.g., childrens' college tuition in the future.
3. Not checking the lifecap on your equity line.  Many credit lines have lifecaps of 18 percent. Be prepared to make payments at the highest potential rate.
4. Assuming that your home-equity loan is fully tax-deductible. In some instances, your home-equity loan is NOT tax deductible. Do not depend on your mortgage company for information regarding this matter--check with an accountant or CPA.
5. Assuming that a home-equity loan is always cheaper than a car loan or a credit card.  Even after deducting interest for income tax purposes, a credit card can be cheaper than a credit line. To find out, compare the effective rate of your home-equity line with the rate on your credit card or auto loan.
   
   Effective rate = rate * (1 - tax bracket)
   Example: The rate of the home-equity line is 12 percent,your tax bracket is 30 percent, your effectiverateis:  .12 * (1 - .3) = .12 * .7 = .084 = 8.4 percent.
   If your credit card is higher than 8.4 percent, the equity loan is cheaper.
6. Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future. Most banks look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage. If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to be turned down.
7. Getting a home-equity line to pay off your credit cards when your spending is out of control! When you pay off your credit cards with an equity line, don't continue to abuse your credit cards. If you can't manage the plastic, tear it up!

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