1. You might need to put down more money to get a better rate
Fannie and Freddie now judge all borrowers (more) equally- by rating the FICO score as the primary qualifier and fitting everyone neatly into the same matrix. Yes, lenders do look at your income, assets and credit but no longer compensate one weak link for another. It is all about the FICO score and not much else matters more. The higher your score, the lower your interest rate and the lower your required down payment. For instance most lenders require that your FICO is no lower than 620 just to get into the game. If your FICO is a 620 to 640, they will cap your loan to value at 70%. These numbers are general and most lenders follow the same guidelines, but some do have more stricter overlays than others. The question is where does your credit score fit into the matrix and what is your (loan-to-value) LTV capped at. After that, find out if there will be a bit of a hike in the interest rate. The first thing you need to know is where do you fit in the matrix…. ask your loan officer to price out your loan based on the FICO score they get.
2. If the house does not appraise out at the contract price, and the seller won’t budge on the price, you just might not get your down payment back.
In most states, there will be a sale contract outlining the terms of the transaction for both seller and buyer. The contract should contain two very important clauses known as contingencies AKA “what if’s”. What if you get rejected for a mortgage? …and… What if the house does not appraise for the contract price? With both cases, you want it to be your choice to pursue another loan, pay more for the house or simply walk away and get your money back. Most sellers will agree to give you enough time to apply for a mortgage and get approved, but they might not allow you to pay less or walk away if the house does not appraise. Ask your attorney to negotiate these clauses to be clear as to any outcome.
3. The annual expenses will definitely go up on your home year over year
Even if you have a fixed rate loan and your payment remains the same for 30 years, the other expenses will continue to rise. Inflation causes basic everyday costs to increase, real estate taxes notoriously creep up and even the price of buildings insurance (aka home insurance) can skyrocket any given year. Ask your agent to get you the average real estate taxes for the past five years, call the utility company and get a printout of the annual usage and ask the insurance agent to give you an estimate on increases in premium over the next five years. Be aware, ask for discounts and shop around.
4. Your parents can’t co-sign for your loan like they used to do
When your parents, or other close person, co-sign for a mortgage it is called a non-occupying co-borrower. This used to mean that your parents would sign for you and you could get anything they qualified for. Now the borrower/primary occupant/you, need to qualify for the monthly housing payment alone and your parents can co-sign only help cover the other stuff- cars, student loans and credit cards. Even so, some lenders will require you to be able all by yourself on your total monthly debt and will just use your parents as extra insurance. So before you ask your parents for help, ask your loan officer if the numbers work to begin with.
5. Maybe, you are not ready to own a home
As I have said a thousand times, owning a home is not the American dream, it is a luxury. Not everyone is cracked up to own a home, so maybe you were meant to rent for the rest of your life. …..and- there is nothing wrong with that. So, before you go do what everybody says is the next step or believing you need a tax deduction, make sure you really want to take care of real estate both financially and emotionally. Only you can tell yourself if you are ready to take care of a home and if you want to be tied down- regardless of what they all say.
Dale Robyn Siegel is an attorney and 20 year veteran in the real estate industry. She is a speaker on all things real estate and the editor of the popular blog, Diaries of a Mad Mortgage Broker. She is the author of The New Rules for Mortgages and is a professor at NYU.