Buying a home is an exciting journey, but it can also be a bumpy ride.
“Mistakes happen, especially if you don’t know what to watch out for,” says Greg Beckman, a real estate agent at Coldwell Banker Realty in Annapolis.
So, what can go wrong when buying a house? Below are four of the most common obstacles that can waylay the homebuying process and how to get around them.
A LOW HOME APPRAISAL
If you’re getting a mortgage, your lender will require that any offer you make is contingent on an appraisal, which is when a professional evaluates the property to make sure the home is worth what you’ve offered to pay for it.
A lender won’t let you borrow more money than a house is worth. Low appraisals are more common in hot sellers’ markets, where stiff competition forces buyers to bid above a home’s market value. However, a low appraisal “doesn’t have to be a deal breaker,” Beckman says.
If you receive a low appraisal, you can appeal it. An appraisal appeal, also called a rebuttal of value, is where your agent puts together a list of comparable homes that show the house is worth what you’ve offered to pay for it. The appraiser reviews the evidence and can choose to revise their valuation.
If that doesn’t work, and the seller is just as committed as you are to keeping the deal alive, you may be able to renegotiate the purchase price to keep the transaction moving along.
BEING TOO ‘HOUSE POOR’
Spoiler alert: Your income impacts what size mortgage you qualify for. Mortgage lenders determine your borrowing power by looking at your debt-to-income ratio (DTI) — a comparison of how much money you owe (on things like student loans, credit cards, car loans and, soon, your a mortgage) to your pre-tax income. For a conventional mortgage, most lenders prefer your DTI not to exceed 36 percent.
So, before you start shopping for a house, Beckman says you need to take an honest look at your budget. “What we tell buyers to do is to go through their finances and make sure they’re comfortable with what their monthly mortgage payment would be,” he says. “At the end of the day, you don’t want to be house poor.”
Another good guideline many financial pros suggest is to keep your housing expenses limited to 28 percent of your gross monthly income. For example, if you make $5,000 a month, your monthly mortgage payment should be no higher than $1,400.
For many buyers, patience is crucial, Beckman says: “It may take some time to find the right home that’s in your price range.”
RELATED CONTENT: Want to learn more about this topic? Our complete guide to buying a home can help you prepare for one of the largest purchases you’ll ever make.
A LESS-THAN-STELLAR CREDIT SCORE
A low credit score can sink your eligibility for a mortgage. Typically, you need a credit score of 620 or higher to qualify for a conventional mortgage and 580 or higher for a Federal Housing Administration (FHA) loan.
If you know you’re looking to buy a home in the near future and think your credit score will make it hard for you to qualify for a mortgage, here are a few easy ways to help raise it:
Lower some credit card balances. Carrying large credit card debt can dock your credit rating. Paying off a credit card, or at least paying down your balance, can help bump up your credit score.
Fix credit report errors. According to one Federal Trade Commission survey, one in four Americans have spotted errors on their reports. You can get all three of your credit reports (from TransUnion, Equifax and Experian) — free of charge — at annualcreditreport.com.
Pay all your bills on time. Your payment track record makes up about 35 percent of your FICO score (one of the most common credit scores).
Another tip: If you know you’re getting ready to apply for a mortgage, don’t apply for new lines of credit so your score doesn’t get dinged by hard credit inquiries.
PROPERTY TITLE ISSUES
As a homebuyer, you’ll hire a title company to verify that the title to the property is legitimate — this will ensure that you become the rightful owner of the home when you purchase it. However, “title issues can crop up from time to time,” Beckman says. Title problems can include things such as judgments or liens against the property, unpaid taxes, missing heirs, easements, property boundary issues or illegal past deeds.
Depending on what the issue is, it may be an easy fix (e.g., a clerical error in a public record) or a bigger problem that takes time to resolve (deed forgery by a previous owner).
Your best approach? Make sure you choose a reputable title company from the get-go, Beckman says. Ask for recommendations from friends, your real estate agent or your attorney.