Home ownership is a cornerstone of the American dream. Unfortunately, there are many ways that the American dream can turn into your family’s personal nightmare.
These hazards include purchasing more house than you can really afford (becoming house poor), unexpected surprises that weren’t identified during the home inspection, and finding out that your pre-approval for financing is about as flimsy as the paper it’s written on.
In a market inundated with realty advertising, let’s look at 4 critical areas where first-time homeowners run into trouble.
Pre-Approval is Not Approval
Homebuyers are inundated with commercials on TV and the internet telling them that they can get pre-approved for a certain amount and shop with the confidence of a cash buyer. This is a bit of an exaggeration. Pre-approval is a good first step. But, it’s important to understand that a pre-approval is different from an approval.
Pre-Approval is when a lender tells you that you are approved for a certain loan, with general terms, but does not require you to provide paperwork and other supporting documentation.
Approval is when the lender has completed the underwriting process and offers you a firm loan offer that can be executed.
The easiest way to know the difference is to consider what information the bank has required of you at this stage. First time homebuyers are understandably upset when they select a home based on what they thought was an approval, only to find that some information came up during the underwriting process that cancelled out their pre-approval.
Digital Verification vs. Manual Verification
In the final stages of becoming approved for a mortgage, you’ll need to provide proof of income and other financial disclosures. Most mortgage lenders offer homebuyers the option of enrolling in digital verification. This means that the lender can digitally access your required documentation on your behalf. Some of this information will need to be manually uploaded, but the ability to digitize these records will allow the entire underwriting process to be expedited.
Manual verification involves a loan officer giving you a long checklist of documents they’ll need in order to verify your identity, income and existing financial obligations. Manual verification can take three-times as long because you need to gather the documents, submit them to the lender and then the lender needs to manually verify their authenticity.
If you are given the option, enroll in digital verification.
How much home can you really afford?
If you’re used to paying rent, the idea of a less-expensive mortgage payment may seem appealing. After-all, landlords price-in the various additional costs they have into your monthly rental payment. If you could just pay the mortgage, it seems that you’d lower your overall housing costs.
This is not exactly true. Just because you can afford the mortgage payment does not mean you can afford the full cost of homeownership. Be sure to inquire into the real costs, including:
• PMI: Private Mortgage Insurance
• Homeowner’s Insurance Premiums, Deductibles and Coverage Limitations
• Maintenance Costs: While renting, your landlord took care of all the costs associated with your residence’s maintenance. As a homeowner, if a major appliance fails, or there’s structural wear and tear, it’s your financial responsibility.
• Natural Disasters: Hurricanes, tornadoes and forest fires can cause substantial damage to your home. Homeowner’s insurance can help with this, but there are policy exceptions. The average ranch-style home would require an investment of $6725-$9000 in order to replace it after major damage.
• Property Taxes are often rolled into the monthly mortgage cost, but it’s important to understand the various fees and assessments you’ll be required to pay for your property.
Just because it’s on the internet, doesn’t make it true.
Most homeowners turn to their smartphones or laptops when home shopping. Online listings for homes and properties are filled with heavily enhanced photos of the property - from the best angles, of course.
Future properties, or areas that are still being developed are impossible to see in-person. But, it’s important to dig deeper than an architectural rendering or an artist impression. This article about off-plan purchases highlights a few examples where the mock-ups provided to potential residents were way off the mark. This includes:
• Amenities, like pools, which are far smaller once constructed - an important consideration for apartment buildings with hundreds of residents.
• The perspective is enhanced to make a future high-rise look far larger than other surrounding buildings - implying that views will be more breathtaking than they will be in reality.
To avoid getting taken advantage of, they recommend visiting the construction site yourself, viewing the surrounding area on Google Maps and take advantage of Google Earth’s features that show building shadows and other factors that could impact your future home.
In conclusion, there are many pitfalls for first-time homebuyers. A pre-approval is a great first step, but it’s only the beginning of the actual approval process. Don’t make the mistake of selecting manual verification when digital verification is available - especially if timing is a factor. And just because you can get a loan, does not mean you can afford the total cost of home ownership. And, as always, trust but verify. If you’re looking at an online listing or prospectus, nothing can substitute an in-person visit to the construction site.