Whether you’re part of the 1 percent or the 99 percent, a house is likely the biggest single purchase you’ll ever make.
Unfortunately, plenty of people make dumb mistakes when buying a house, mistakes that could cost tens of thousands of dollars in extra interest or, worse, saddle them with a home they can’t afford and can’t unload.
Here are seven dumb moves homebuyers make year after year. Read on so you can avoid them.
Dumb Move No. 1: Ignoring your credit score
Your credit score can make or break your interest rate. You see, lenders save their best interest rates for those with the best credit scores. They know people with great scores will almost certainly pay off their loan in full.
Meanwhile, if your credit score is hovering somewhere in the 600s or below, lenders get nervous that you’re going to bail or go bankrupt on them. Sure, they might still give you a loan, but they’re going to jack up the interest rate so they can get as much interest as possible before your finances potentially go belly up.
At today’s interest rates, FICO estimates a person with a credit score of 639 will pay $138 more a month for a $150,000 mortgage than an individual with the same mortgage and a credit score of 780. That translates to someone’s crappy credit costing them nearly $50,000 more over the life of a 30-year, fixed-rate loan.
Don’t make the mistake of ignoring your credit score before house shopping. If your number is stuck in the basement, use our tips to raise your score as quickly as possible.
Dumb Move No. 2: Not getting pre-approved for a loan
Dumb move No. 2 is failing to get pre-approved. This isn’t the same as being prequalified, although some people use the terms interchangeably.
Being pre-approved by a lender gives you a realistic number to use while house shopping. It can also give you an edge if multiple people are placing offers on the same property.
However, be realistic about what you can actually afford versus what the bank says you can afford. Borrowing up to the bank approved limit may stretch your finances and set you up for a major catastrophe in the event of a job loss or injury. My advice is to shave at least 10 percent off the bank-approved amount and use that as your maximum price while house hunting.
Dumb Move No. 3: Falling for an expensive loan
When you’re talking to a lender, don’t fall into the trap of signing on to a risky loan. Banks and brokers can sometimes use adjustable-rate or interest-only loans to persuade people to buy more house than they can afford.
These loans start out with low payments, usually for the first five years, and then the interest rate adjusts and takes your payment skyward. Some mortgage reps will try to convince you this is no big deal. They will say you can just refinance in five years or perhaps sell the home.
Well, that didn’t work out so well for all the people who signed on for subprime mortgages before the Great Recession and then saw their home values disintegrate. Those people couldn’t refinance their underwater loans or sell their home, and many ended up staring at foreclosure notices.
Resist the sales talk and keep your feet on the ground when looking at houses. A fixed-rate mortgage gives you security and peace of mind, which may not be as glamorous as the giant house of your dream, but it sure is smart.