Top Five Mistakes Home Buyers Make

Top Five Mistakes Home Buyers Make

By Stacey L. Bradford, SmartMoney

Looking for a new home? Well, you're in luck? sort of. First, the good news: Home prices are falling and buyers have more negotiating power than ever before. Now, the not-so-good news: Lining up financing has become much more difficult as droves of current homeowners default on their existing mortgages. This isn't to say you won't be able to secure the home of your dreams, but you will need to be a bit more cautious and conservative with your purchase.

Here are five mistakes to avoid when looking for a home in today's real estate market.

1. Waiting to Sell Your Home

Now that the housing market is slowing it's more important than ever to sell your existing home before you commit to a new one. Here's why. In the current environment, it's going to take you longer to find a buyer than it would have just a year ago. If you don't start showing your home until after you've signed a contract for a new place, you're taking on the added risk of carrying two mortgages for an extended period of time, warns Elaine Clayman, a real estate broker with Brown Harris Stevens.

Also, the only accurate way to know how much your home is really worth is to see how much someone else is willing to pay for it. "If for some reason you've overpriced the property you already own?you'll know that after the first 30 to 45 days it's on the market," says Peter Comitini, a real estate broker with the Corcoran Group. Once you have a realistic picture of how much your home will fetch, then you can adjust your budget for a new home accordingly, he says.

2. Ignoring Your Credit Score

Get a copy of your credit report as soon as you decide it's time to move. Nearly 80% contain some type of error and 25% of those mistakes are serious enough to drag down your credit score, potentially disqualifying you for the most competitive interest rate on a mortgage, according to U.S. PIRG, the federation of state Public Interest Research Groups. How much can your credit score affect your loan? Someone with a score of 630, for example, would pay one interest point higher than another borrower with a score of 730, says Geoffrey Sheerar, a mortgage broker with Apple Mortgage, a New York City-based mortgage brokerage firm.

This is also your chance to discover and settle any delinquent accounts. "I've seen a client get a worse credit score than he should have over a $40 doctor bill that went to collection that the person didn't even know about," says Sheerar. Keep in mind, once you find a problem, it can take several weeks and a bit of leg work to have the black mark taken off of your credit report.

3. Skipping the Mortgage Preapproval Process

The days of easy money and low teaser rates are over. In this tight lending environment, it's important to shop around for a mortgage and get preapproved by a lender before you even start visiting open houses. While borrowers, even ones with very low credit scores, had hundreds of options just a couple of months ago, that's simply not the case today. Many lenders have stopped underwriting riskier loans in favor of more traditional fixed rate mortgages, says Keith Gumbinger, vice president with HSH Associates Financial Publishers, a Pompton Plains, N.J.-based mortgage research firm.

By getting preapproved, you'll not only get a realistic idea of the type of financing available to you, but you'll also have a better idea of what your interest rate will look like. Scanning the newspaper for prevailing rates isn't all that helpful since lenders will adjust your rate based on how risky a borrower they feel you are. At the moment, someone with excellent credit could qualify for a 7.5% interest rate on a $450,000 loan and another buyer with a closer to average credit score could get charged 8% or 9%, says Gumbinger. Rates are certain to fluctuate as you shop for the perfect home. But once you have a ball-park figure, you can plug it into a mortgage calculator to see how much home you can afford to buy.

4. Not Budging on Your Budget

As we mentioned earlier, buyers have more negotiating power than ever. So don't be afraid to make an offer that's well below the asking price. That said, once you find a home you really love and you're negotiating on price, you'd be foolish to walk away from that property over just a few thousand dollars, says Brown Harris Stevens' Clayman. That's especially important if you're borrowing the money to buy that home. Think of it this way: On a monthly basis, an extra $10,000 (on a loan valued less than $417,000) will cost you just $63.

5. Signing a Contract with Contingencies

Unfortunately, it isn't enough to secure financing and find a place that you're comfortable calling home. You also need to find a seller who's ready to move quickly. That means avoiding folks who want to include all sorts of onerous contingencies in the selling contract that would allow them to stay in their house for an extended period of time. One situation you want to avoid, for example, is when the sale is dependent on the seller finding a new home first, warns Corcoran's Comitini.

The risk here is that you wait around for months only to watch the interest rate lock on your mortgage expire, thus forcing you to spend more money for the same home. Or, the deal could fall apart entirely, putting you back at square one with the real estate listings spread out on the kitchen table.