The 5 Most Costly Buyer Mistakes
1. Not Having a Clear Picture of their Comfortable Price Range
2. Timing the Purchase Incorrectly
3. Backward Approach to Finding the Right Home
4. Selecting the Wrong Home Inspector
5. Selecting the Wrong Lender
1. Not Having a Clear Picture of the Comfortable Price Range: Most buyers follow a backwards approach to the process of determining their price range for houses they want to buy. The worst case scenario is that they first start the process by finding houses they like, and then try to figure out what this will mean to them in terms of down payment, closing costs and monthly payments. Worse yet, they seek out houses based solely upon what I’ll call ego. This is where they base their property search on the price house they “think they should be able to afford” or based upon the price house that their friends or co-workers bought. All of these approaches often result in the buyer having to start the process again from the start once they know the financials.
Ok, so you’re smarter than to make these mistakes! But, have you fallen into the trap of relying upon the online Mortgage Estimators on real estate websites? While even Mortgage Calculator on my website will very accurately tell you the “monthly payment” for a given loan amount at a given interest rate, these tools are almost too dangerous to be of any real benefit. The reason is that they don’t tell you the full picture about the taxes, home owner’s insurance, private mortgage insurance and HOA or condo fees. These items alone can make a difference of well over a thousand dollars in your actual monthly payment. These mortgage calculators also don’t tell you about the closing costs required for the purchase, or whether the down payment you are considering is a viable option considering the loan products available or whether you are considering all your loan down payment options which can minimize other costs and fees. Even when using these mortgage calculators, what you don’t yet know can cost you thousands of dollars…keep reading!
Other buyers will take the seemingly intelligent step of calling a lender and asking “how much can I qualify for?” The lender will dutifully ask about the buyer’s income, assets and debts, pull a credit report and run the debt to income ratios. They will then announce to the buyer the price range of houses they can buy. The problem is, my experience is that while people may be qualified by the bank for a certain price range, they often are not aware of or comfortable with the settlement costs and monthly payments required for that purchase price.
There are two simple numbers which you should know and that a good agent can use to help you quickly and easily understand your Comfortable Price Range:
- How much savings do you plan to use in this purchase for your down payment and closing costs?
- What have you budgeted for your monthly housing payment (including loan principle, interest, property taxes, home owner’s insurance and HOA or condo fee if applicable – not including utilities)?
With these two numbers, a good agent should be able to prepare Estimates of your Monthly Payment and Closing Costs for a range of sales prices which will allow you to be comfortable with the final numbers. Interesting enough, many real estate agents are really not comfortable working with financial numbers and even top producer agents leave this up to the lender.
At Upham Real Estate, we always prepare an initial Financing Estimate which we review with our buyers during the first meeting. This serves as an invaluable resource for you as you look at properties so that you have a very clear understanding of your comfortable price range. We can also prepare new estimates for you when you start to narrow in on particular properties. Then, prior to signing an offer on a property, we will carefully review an estimate prepared for the particular property you want to buy, taking into account the specific loan program and interest rate which you’ll be using. I’ll be honest with you that I’m not aware of any other agents who provide these invaluable financing estimates to their buyer clients at any point in the process. This goes back to the old saying that “what you don’t know can definitely hurt you” (and cost you thousands of dollars)!
2. Timing the Purchase Incorrectly – Ok, so you know that you’re getting close to the time you should be thinking about your upcoming purchase. So, you do the logical thing of starting to attend open houses and talk to agents about visiting properties. The biggest mistake I see buyers make when it comes to the timing of their purchase is that they don’t have a clear understanding of the factors affecting the timeline of their purchase. This becomes extremely important because if you engage the process and get seriously interested in a particular property too early, there are four factors which could cost (or save) you thousands (and sometimes, tens of thousands) of dollars.
Interest Rate Lock – When you get a ratified contract on a house, you know that you can lock your interest rate. However, did you know that you can only lock that interest rate for about 50 days before settlement without incurring thousands of dollars in fees?
Quick Settlement (The best way to save thousands of dollars on the price of your home, and make your offer more attractive to the seller, without costing you anything!) - Buyers sometimes end up falling in love with a vacant home where the seller has already moved, or would like to move soon. If you have selected a lender who can support a quick settlement (within 2-3 weeks), and you can offer a settlement date before the end of the current month, you can save the seller from having to make their next mortgage payment. This often translates into real money to the seller…it can mean that the seller will be willing to accept a sales price as much as $5,000 less simply by you and your lender being ready, willing and able to close quickly! Or, if you’re in a multiple, competitive offer situation on a gorgeous property that is priced very attractively, chances are that the other buyers will be using lenders that require 30-45 days to process their loan – therefore, your offer with a quick closing, which saves the sellers real money, will have a much better chance of getting selected, allowing you to beat the other buyers and get the house of your dreams. All while allowing you to pay less money for the house!
Mortgage Interest at Settlement – When you go to settlement, your closing costs will include the interest on the mortgage for the remainder of the month. For this simple reason, many buyers choose to go to settlement toward the end of the month in order to reduce the cash required for settlement.
Double Housing Payments – As mentioned above, at settlement, you will pay the interest for the remainder of the current month. Then, your first mortgage payment will not be at the beginning of the next month – instead, since mortgage payments are paid in “arrears,” your first payment will be due at the beginning of the following month. Armed with this information, you can best time your move so that you can possibly avoid making double housing payments after settlement.
Each of these timing issues are critical for either avoiding paying thousands of extra, unnecessary dollars or by allowing you to save thousands of dollars in your purchase. Is your real estate agent going to be able to advise you on how to optimize the timing of your purchase?
At Upham Real Estate, one of the first questions we ask is your ideal moving date. This allows us to back up the timeline and tell you when you should be making an offer on your dream house in order to ensure that you avoid costly timing errors and help you save thousands of dollars on your purchase! Since each home buyer goes through a process of learning about the houses available on the market, we can help you define the time period which will be your “Education Phase” of your house hunting. During this time you’ll be learning about which neighborhoods. types of houses and features are important to you. But, you’ll also know not to fall in love with any of these houses, because it is still too early in the process. If you stay disciplined in your timing strategy, you’ll then be able to move into the “Action Phase” where you are armed with all the information and market research you need in order to be able to save thousands of dollars on your dream home!
3. Backward Approach to Finding the Right Home: Many buyers use a backward approach to the process of finding the right home. This means that they start driving various neighborhoods they like and writing down the addresses of houses they like which have “For Sale” signs out front. The problem with this approach is that 80% of these great homes you find in this manner are no longer on the market (ie: they are under contract), not in your comfortable price range, or don’t have the basic features you need in a house (ie: not enough bedrooms, bathrooms, living space, etc). Like so many other buyers who fall into this trap, while you will have learned a lot about various neighborhoods and seen a lot of houses you think you like, you’ll end up finding out that you wasted a full day of valuable time off from work on houses that won’t actually work for you.
The best and smartest approach to finding your dream house is to start in the comfort of your own home or office on the computer! Start an online property search by entering your basic criteria including: zip code (or use a map based search to identify the broad areas that work for your commute), price range, minimum number of bedrooms and bathrooms. You can review the search results and then head out to visit the houses and neighborhoods that are actually available and meet your criteria.
Note about online property searches – The biggest mistake I see buyers making with their searches is that they enter too much information…they use too many specific criteria such as fireplaces, garages, dining rooms, foreclosure, short sale, REO, bank owned, HUD owned. The result is that the search results will return no properties, or very few properties and these buyers will get frustrated. Additionally, I’ll make a special note about using square footage in property searches. Many MLS listings in the Alexandria and DC Metro area do not specify the square footage. When buyers enter their desired minimum square footage, the search results will leave out some of the best properties which otherwise meet their square footage criteria, but simply didn’t have it listed in the MLS. The best approach to ensure you don’t miss out on your dream house is to limit your search criteria to zip code/map search, price range, and minimum number of bedrooms and bathrooms. Then just review and visit each listing individually to see if it will be a good fit for your needs.
4. Selecting the Wrong Home Inspector – Every buyer knows that not all home inspectors are created equal. Every buyer has also heard stories about “money pit” properties which had hidden problems which cost them thousands of dollars. The average home inspector produces a short, hand written report where they check the boxes regarding the condition of the various systems. On our Preferred Partners page, we’ve recommended two home inspectors which produce professional, .pdf reports that average 35-65 pages with full color embedded pictures which allow us to clearly document and justify repair request to the seller.
Some home buyers feel that they should never use a home inspector who is recommended by their real estate agent. They believe that the home inspector will “rubber stamp” the property in order to keep getting business from that agent, without finding the important, costly defects in the property.
While this believe may very well be valid with the inspectors recommended by some agents, at Upham Real Estate, we have established long term working relationships with the two best home inspection companies in the industry. These inspectors utilize their experience inspecting thousands of homes to find the problems the buyer needs to know before moving forward with their purchase. My experience is that with about 50% of the houses our buyers like, these inspectors also uncover very significant issues with the house which the buyer must consider very carefully.
With each of our clients, once we have the inspection report, we put our years of prior experience as an engineer to work carefully drafting comprehensive justifications and repair specifications so that we can ensure that the sellers correct the problems uncovered by the home inspector. We will advise you through each step of the home inspection repair negotiation process to ensure that your interests are accurately represented and protected so that you can be confident with your purchase.
5. Selecting the Wrong Lender: Since the typical home buyer doesn't know any better, they go about selecting a lender for their purchase based primarily upon the interest rate and their familiarity with the name of the bank. Don't get me wrong, these are both extremely important in your decision making process! However, the educated home buyer knows that there is much more than meets the eye when it comes to mortgage loans and they know what other factors and information they need to assess in order to ensure they have selected the best lender for their purchase.
Organizational Structure of the Lender – Believe it or not, this is the single most important factor I have seen which will affect how smoothly your purchase transaction gets to settlement. The first and only person that the typical home buyer will ever speak with at a mortgage lender is the loan officer. However, there are three additional people at the bank who will be critical to the success of your loan. These are the loan Processor, Underwriter and Closer. After your loan officer takes your initial loan application, they will hand your file off to the loan processor to finish gathering any required documents from you and they will ensure that your file is complete and packaged properly. Your loan officer and processor are your advocates throughout the process to help your loan get full approval. Once they have completed your file, they will turn it over to the Underwriter for review and approval. The Underwriter is like a judge who reviews your file to ensure it meets the very stringent regulation guidelines so that it meets federal and industry requirements. The underwriter will likely have some questions and require additional documentation from you to ensure that all the i’s are dotted and t’s are crossed. Many very well qualified buyers often find this part of the process very exhaustive, frustrating and intrusive. If you haven’t bought a home in the last couple years since the mortgage crisis hit its peak, you may be surprised to see how much the pendulum has swung from the days of free and easy, 100% financing, no documentation loans which buyers became accustomed to during the real estate boom. You should expect that the underwriter ask your loan officer to come back to you requesting more information or documentation necessary to clear the “conditions” or loose ends in your file. Finally, the closer is the last person at the bank to touch your loan after it receives a final approval and “clear to close” from the underwriter. They will prepare the stack of loan instructions and documents which are sent to the settlement company for you to sign at settlement.
I mentioned that the organizational structure of your lender is one of the most important factors in ensuring that your loan makes it smoothly to settlement. While all lenders have the same functional departments (loan officer, processor, underwriter and closer), since many of the big, national banks with names that you would recognize are so large, they consolidate the processing, underwriting and closing departments in a centralized location, such as Jacksonville Florida, Minneapolis Minnesota, Charlotte North Carolina or Pittsford New York. What this means to you is that after your nice loan officer completes your loan package, they send it off to the underwriters in some other state. The loan officer doesn’t know the underwriter and has very little or perhaps no pull or influence with the underwriting department. A typical buyer will ask their loan officer how long it will take for their loan to be approved and the lender will reply, “I’m not sure…it is in queue with the underwriters…perhaps two weeks?” The fact is that your loan package will go to the bottom of the stack of files in the overworked underwriter’s inbox. When the underwriter has questions and conditions on your file, you’ll go through that process all over again. By the sole reason that the underwriting department for this big, national bank is centralized this underwriting process will take much longer than really necessary. These banks will often say that they need 30-45 days to complete your loan. It’s not that loans take this long to approve…it’s simply that the organizational structure and bureaucracy of this big, national bank adds too many layers to the process making it very inefficient. Then when the underwriter is finally finished, it will go to their centralized closing department which is so institutionalized that they require 3 business days to prepare your loan documents for the settlement company. And, since the underwriting process took so long, we might be up against the wire with your contract settlement date. The loan officer will start telling us that they can’t guarantee that your loan will be ready on time for the contract settlement date. Since you’re contractually obligated to be ready to close on the contract settlement date, this will introduce a significant amount of stress into the situation for the buyers, seller and agents. Additionally, since you are a responsible buyer, you will have already made arrangements for movers, utilities and home improvements based on the understanding that we would be closing on time. The stress level at this point is through the roof and we have to start making intimidating calls and threats to the lender in order to do everything we can to ensure they do their job and get your loan to closing on time.
I’m sorry for going into all these gory and frightening details, but there is a much better and stress free way of doing business! If you chose a local, mid-sized lender that had in-house processors, underwriters and closing departments, they would simply walk your file across the hall to the underwriter and say that this is one of Chris Upham’s clients and we need you to look at this file right away. It’s that simple! The loan officer has close working relationships with the processors, underwriters and closers so that if needed they can use a personal touch to help them better understand your particular situation. If there are any last minute changes to the loan due to final negotiations between the buyer and seller on credits for home inspection items, the closer at this local, mid-sized lender doesn’t need 3 business days to prepare your loan documents for the settlement company. They can, and often do, efficiently push out the required documents quickly and efficiently. The fact is that it doesn’t cost you any more to receive this kind of personal service. The interest rates and fees are the same as the big, national lenders. My clients who make the wise decision to use local, mid-sized lenders find that their loans receive full approval weeks before settlement allowing them to focus on more important things, like picking out paint colors, furniture and making arrangements for their move. These smart buyers don’t have to live the frenzied, stressful experience of all the last minute loan hurdles that other buyers experience. With these local, mid-sized lenders, there is no question of whether your loan will close on time. They will do whatever it takes to ensure that your settlement date is secure so that you don’t have to face the frustrating uncertainty of moving target settlement dates.
Interest Rate - The truth is that all reputable lenders do everything they can to get their clients the best possible interest rate! Lenders know that they are in fierce competition for your business and in order for them to survive on referrals from satisfied past clients; they don’t mess around with trying to cheat you on the interest rate. Interest rates fluctuate daily (and sometimes several times each day) and the first opportunity you will have to lock your interest rate is after you have achieved a ratified contract on your new home. At that point, your lender will advise you on all of your options for getting the best possible interest rate available in the market at that point. There are numerous factors which affect the interest rate for your specific loan product, including: loan type (conventional, FHA, VA), size of down payment (25%+, 20%, 10%, 3.5%, 0%), whether the loan is conforming, jumbo conforming or jumbo (ie: is your loan amount after the down payment less or greater than $417,000, or is your loan amount greater than $729,750), your credit score and whether your new home is a condo. You will also have the option of paying a lower interest rate by paying discount points. When buyers make calls to poll lenders about their interest rates in order to select a lender, chances are that you haven’t given the lender enough information to give you an accurate quote – they really need you to complete a full loan application to be able to provide you the most accurate information. Since the interest rates fluctuate on a daily basis, the rate a lender tells you on the first day you call may very not be the market interest rate days, weeks or months later when you have a ratified contract and are able to lock your interest rate. Additionally, loan officers might: tell you a rate lower than the actual market rates available if they are desperate for business and want to suck you in to working with them; tell you the actual market rate available that day, with the caveat that the rates will fluctuate and may be different when you are able to lock in your rate; may possibly round up the interest rate a little, not to cheat you on the rate, but rather to provide you with a conservative estimate and manage your expectations and purchasing power in the event that the available market rates are slightly higher when you’re able to lock in your rate. So you see that there is a lot that goes into the actual interest rates applicable for your situation and what a lender may tell you. Therefore, selecting a lender primarily on the basis of the interest rate they tell you on an initial query is not a very reliable way to ensure that you select the best lender for your needs.
Important Note: You’ll be starting to pay much more attention to interest rates now that you’re preparing to buy a home and you’ll be noticing tons of radio, internet and TV ads about lenders and interest rates. The purpose of these ads is to get you to call and work with that lender…and, there can be quite a bit of almost deceptive advertising in the mortgage industry that preys on the home buyer. A big advantage you will enjoy by using a lender that has a close working relationship with your real estate agent is that the lender will know that they are accountable to your agent and will want to ensure that you get the best rate possible. Your best bet to ensure you select the right lender that will get you the best possible interest rate is to keep reading…
Points – The single most important question that you need to ask anytime a lender quotes you an interest rate is, “what are the points I need to pay in order to get that rate.” There are two fees that lenders may charge which go hand in hand with the interest rate. These two fees are measured in terms of “points.” One point is 1% of the loan amount. There will be a market interest rate for your loan based upon all the factors mentioned earlier. Any lender can get you a interest rate lower than the market rate, but there will be a cost/fee associated with getting that lower rate. This is called the “Discount Fee.” It allows you to pay money up front at closing in order to “buy down” your interest rate. The discount fee does not go toward your principle or equity in the house. It is a one-time, upfront fee paid at closing which allows you to get a lower interest rate for the life of the loan. Each day, lenders receive the market pricing for the interest rates. The normal, market interest rate applicable to your loan product is often referred to as the “zero point position.” The lender will also have on their interest rate matrix, the pricing for buyers to obtain a lower rate than the zero point position. The lender will be able to tell you how many “discount points” you would need to pay in order to get an interest rate lower than the zero point position. The pricing for buying down the interest rate with discount points is an exponential curve, meaning that for each lower interest rate, the cost of the discount fee will be significantly higher. For example, you can get the zero point position, market interest rate without paying anything extra. In order to get an interest rate which is 0.125% lower than the zero point position, you might pay 0.375 discount points (which is 0.375% of the loan amount). To get an interest rate 0.25% lower than the zero point position, you might pay 0.625%-1.0% discount points (which is 0.625%-1.0% of the loan amount). To get an interest rate which is 0.375% lower than the zero point position, you might pay 1.5-2.0 discount points (which is 1.5%-2.0% of the loan amount). To get an interest rate 0.5% lower than the zero point position, market interest rate, you might pay 3.0 discount points (which is 3.0% of the loan amount). These pricing figures fluctuate daily with the interest rates, so these numbers are just meant to be an example which demonstrates that you can obtain a lower interest rate, but there is a cost associated with the lower rate. And, there is a point of diminishing returns where it no longer makes good financial sense to pay so much cash up front for a lower interest rate. A good loan officer and real estate agent can help you better understand your options when it comes to getting the best possible interest rate.
There is another lender fee called the “Origination Fee” which is also measured in terms of points. There can be some confusion when asking lenders about this since the HUD-1 Settlement Statement was changed in recent years so that the lender fees (discussed below) are referred to as Origination Fees. However, some lenders routinely charge their buyers a 1.0% Origination Fee. Since this can cost you thousands of dollars at settlement, it is extremely important for you to find out before you start working with a lender if they will be charging you a 1.0% Origination Fee. There are plenty of lenders who do not charge this 1.0% origination fee, but many of the big name lenders you would recognize might charge this fee. And, chances are that you won’t be aware of this fee when you start working with the lender until after you have a contract on a property and are too far along the process to really do anything about it. None of the lenders I recommend for buyers ever charge this 1.0% origination fee, but I can’t stress enough how important it is for you to be sure that the lender you are considering does not charge this fee, since this is the single biggest factor when selecting a lender which could cost you thousands of dollars.
Fees – All lenders have fees associated with the loan which should be in the $850-$1,250 range. These fees will cover the appraisal, processing, underwriting, tax service (paying your tax bill over the life of your loan) and flood certification (checking to ensure your home is not in a flood plain. These are wrapped into your closing costs and paid at settlement. At Upham Real Estate, we provide you with detailed Settlement Costs Estimates and we spend time reviewing these with you so that you understand the purpose of each fee. There are a few lenders who advertise their “No Fee Loan.” Believe me, these guys aren’t giving their loans away and they have the same costs as every other lender. I had a brilliant client once who decided to ask a lender to provide a loan summary for both the “no fee” and the “fee” loan so they could compare them side by side. It was amazing for these buyers to see that the “fee” loan was actually less expensive than the “no fee” loan. Remember the old adage, “you never get something for nothing…” You’ll still be charged for the lender’s costs, but their fees will be hidden in the interest rate and points. Some lenders, especially those you find online, will charge you an “application fee” of about $450 before they will provide you with a Pre-Approval letter. This is to cover the cost of their time when you decide not to work with them. However, when you use a lender that has a relationship with your real estate agent, you should expect not to pay any “application fees” until after you have a ratified contract on a property and are well on your way to settlement. This will cover the cost of the appraiser in the event you end up deciding not to move forward with the purchase after the appraiser has completed their inspection and report.
So, as you can tell, based on my years of experience with helping hundreds of buyers with their purchases, I have become very opinionated on what makes a good lender. And these factors are all things that the typical home buyer wouldn’t know if their agent hadn’t given them the proper “insider education” about the loan process.
Every responsible buyer wants to be sure that they “shop around” when it comes to lenders. I encourage you to do this, but I also encourage you to learn from these stories about the costly mistakes made by other buyers who simply call a lender to “ask the rates” without knowing the most important questions to ask a lender. I’ve had the opportunity to work with about 30-40 different lenders and loan officers. I’ve seen the good, the bad and the ugly. You might buy a home once every 3-6 years. But, in the course of helping my buyer clients, I often “buy” 3-6 homes each month! I put this experience to work for each of my clients to ensure they have the knowledge necessary so that their purchase experience goes smoothly!
One more note about lenders. When you submit your offer to purchase a property, we will include your custom tailored pre-approval letter. Good listing agents will carefully scrutinize the pre-approval letter and advise the seller about the likelihood they will encounter problems with the lender you have selected. Good listing agents in the industry know all the things I’ve told you about lenders. Chances are that they have also had good and bad experiences with the various lenders. I find that when my buyers submit a pre-approval letter from one of the lenders I’ve recommended, the listing agent will tell me that they have worked with this lender before and had a good experience. The listing agent will tell me that they feel comfortable that the deal will get to settlement smoothly and will advise their sellers that your financing is solid. Believe me, this goes a long way in helping your offer to get accepted, especially if we are in a multiple, competitive offer situation where the other buyers are using one of the “other” lenders.