5 Ways We Screwed Up When We Bought a Home That Could Have Been Avoided
When we bought our condo a couple summers ago, we just assumed it would be a breeze because, well obviously, I’m a financial planner, so isn’t this like my wheelhouse? Plus both my husband (then-boyfriend) and I had bought homes before, so we figured we were good to go. We were wrong. In fact, we had to delay our closing by 24 hours because of one of the mistakes we made.
1. Pre-approval is just the beginning.
In a competitive housing market, sellers typically won’t even consider offers from buyers who aren’t pre-approved for a mortgage. Obtaining a pre-approval is a relatively easy process. You simply provide your mortgage banker with your Social Security number, annual income and a few other simple facts. However, if you get pre-approved, you’ll have to prove the information you provided, so don’t give inflated numbers.
But isn’t that a hard credit inquiry?
It is, but when you’re buying a home, the mortgage company kind of expects to see that you’ve looked into qualifying before you’ve signed a contract to buy a home. Don’t NOT get pre-approved just to avoid a “ding” to your credit — it’s tiny and it won’t affect your loan, as long as the only hard inquiry is for a mortgage (it’s definitely not the time to take out a bunch of store credit cards).
Pre-qualification avoids a hard inquiry, but then there’s no commitment from the bank, so if you’re bidding on a house against someone who has a letter from the bank saying they have already vetted them for a loan, you’ll most likely lose. Get pre-approved.
We didn’t necessarily screw this one up, although we didn’t realize the importance of this step until we’d already done it — in retrospect, we should have shopped around a little more.
2. Set aside some time to address next steps.
I was totally taken by surprise at how much work was needed after we’d found a place. Luckily at the time I was in a job that wasn’t super busy so I had time to do all this, and even then it was a scramble. Having your offer accepted by a seller sets off a whirlwind of time-sensitive tasks. Not only do you have to schedule, complete and PAY FOR the house inspection within a week, you’ll also have to hire a lawyer and secure a homeowners insurance quote right away. Best to get these things lined up before you start making offers, including making sure you have flexibility to attend the inspection.
Your real estate agent may have suggestions for people to help you, but it’s less stressful to shop around a bit first to make sure you’re getting the best price from someone you actually like. We didn’t do this and ended up getting a mediocre inspection that missed some major issues, and definitely overpaid for homeowners insurance that first year because I just went with a friend who could get it in place ASAP.
Your contract will also set a “clear to close” date that could be only a couple weeks away, which means you’ll have to get hopping on formally applying for a mortgage. This requires providing a slew of financial documents so if you’re not super-organized, you’ll need a couple of hours to gather and scan everything you need like tax returns, W-2s, bank statements, etc. And if you’re self-employed, you’ll need to provide a current income statement, which is akin to preparing for tax time — this was the case for my hubs (again, then-boyfriend), and figuring this out was pretty much our first money fight. Better get busy.
3. Save your pay stubs.
Standard document retention guidelines tell you to save your most recent pay stub and shred the rest. However, when I applied for a mortgage, I had to show my last two months, which was a hassle since my employer at the time still provided paper stubs and mine were long gone in the shredder. If your lease is almost up and there’s any possibility you’ll be buying, stop shredding for a bit.
4. Prepare to explain everything in your bank account.
I’ve never been audited by the IRS (knock on wood), but I felt like that’s what was going on during the mortgage application process. You’ll have to provide your last two months of bank account statements to verify that you have the money required for a down payment and that you aren’t living on the edge financially, which makes you a risk factor for not paying your mortgage.
I was surprised at the level of explanation required of my checking account activity. Particularly, I had to explain and provide documentation for any deposit of more than $1,000. I had a mobile deposit of an expense reimbursement check that didn’t show who wrote the check. This was a big sticking point that held up the process until I could get an actual copy of the check.
Since I obey my bank’s rule of shredding the check 14 days after the deposit clears, I did not have the check anymore and my bank didn’t retain the mobile deposit image. This explanation didn’t matter to my mortgage underwriter and subtracting the amount from my available funds was not an option. Make sure you keep documentation of this stuff if you’re planning to apply.
Additionally, if you’re planning to use gift money for a down payment, you may need a gift letter explaining that the money is yours to keep, and they can be very picky about this. Banks are sticklers for making sure the money in your account is actually yours and not just there to make it look like you have a down payment. If you’re not selling an existing house and planning to use the proceeds for a down payment on your next house, you’ll have to demonstrate very clearly that you have the funds and have had them for some time. This is what led to our final mistake, which delayed the closing at the 11th hour.
5. Make sure you can access your money.
This sounds silly, but in today’s digital age, it’s easy to go for months or even years without stepping foot inside your bank’s branch. When you go to the closing for your new home, you’ll need to bring a cashier’s check for your down payment and any closing costs that you’re not rolling into your mortgage, and you won’t know the exact amount until pretty much the day before. If your bank is in Michigan and you now live in Illinois, that could be a problem, which is what happened with us.
We were able to demonstrate that we had the money for the closing by showing statements, but when we discovered about a week before the closing that there were no longer branches for the bank where the money was held, we quickly opened an account with a national bank and moved the money there. This ended up being a BIG problem when we showed up for the closing. Not only did we have to show documentation of the movement of the money, but that opened up scrutiny of every transaction we’d had since the mortgage approval, including another freaking expense check.
My blood still boils when I think about sitting in the title company office with the sellers’ attorney, who was over-the-moon annoyed that she’d given up her afternoon only to NOT CLOSE. It was obvious we had the money and it was obvious that it was a clerical issue that needed to be resolved, but that horrible woman refused to give us the keys, meaning that at 8:00 the next morning, when the mortgage company gave the green light, I had to make another trip to the title office to pick up the keys.
Lesson learned: Don’t move any money as you’re preparing to close — even if it’s something as innocent as opening a joint account so you can dip your toe into combining money, it could present a huge hassle with your mortgage lender. Wait until you have the keys in your hand, then do what you need to do with your finances.
Buying a house is big deal. Don’t let the intrusive and extensive mortgage application process ruin an otherwise happy and exciting occasion. Be prepared!