Unfortunately, being under contract does not guarantee that you will be able to close on the property, but the vast majority of reasons that a deal falls out of escrow (contract) are completely avoidable. The following 7 first time home buyer tips will help you avoid all of the most common first time home buyer mistakes that ruin deals and make them fall out of escrow.
I spoke with several of the best lenders and agents in my network in order to compile a list of the most common reasons that a deal might not close.
I then compiled the best solutions for these issues, in order to ensure you can sidestep these potholes.
1. Financing large transactions while under contract
Any large transactions you finance—or even just purchase—while you’re under contract can affect closing. Let’s say, for example, that your debt-to-income (DTI) ratio is pretty close to the minimum necessary for you to qualify for your home. If you then go and finance $3,000 worth of furniture for the home, you might find that your DTI increases enough that you no longer qualify for that loan.
The same could be said for a large cash purchase, especially if the money was needed to show for cash reserves or closing costs.
The bottom line is this: from the time you are pre-approved for the loan until after you have closed on the property, you shouldn’t make any large purchases, or finance anything at all.
If you just HAVE to have that thing…talk to your lender before you buy it in order to ensure it won't cause your loan to fall through.
2. Missed payments on any loan, especially a mortgage
I feel like this should be self-explanatory, but don’t miss ANY payments on loans you have out. A friend of mine accidentally missed a mortgage payment while under contract to purchase another home and, as a result, he was unable to purchase the property.
He didn’t miss the payment because of a lack of funds, but simply because he forgot to send the payment.
Ensure you don’t miss ANY payments on ANY loans while you’re under contract!
3. Don’t change employment or pay structure
This is one of those oddball first time home buyer tips that through me for a loop the first-time I saw it mess with somebodies loan. That is because the person in question had just switched job fields to take a large pay raise…but it was in a different career field, and his lender was unable to work with him due to a lack of employment history *facepalm emoji*
Unless you receive a pay increase, you shouldn’t change anything with your current employment, or pay structure while awaiting closure.
For example, if you’re paid on salary, and have been for the last few years, don’t switch to a commission-only compensation structure—even if you will make a lot more money—until after you close on the home.
The reason is that your W2 reflects a salary for income verification, and there will be no way to verify your income on a commission basis.
If you are considering any pay or employment, changes talk to your lender first to confirm whether or not they will impact your purchase at all. Better safe than sorry!
4. Misrepresenting savings or reserve capital
Misrepresenting is a nice way to put this, but the reality is that a lot of people lie about how much money they have in their savings accounts, 401k, and investments.
Your lender will need to see all of these account statements, so just be honest from the beginning. Your 401k balance may be considered as cash reserves for the property, but if your balance is much lower than you originally stated, it could throw things off.
5. Closing Costs – Most Often Forgotten of the First Time Home Buyer Tips
This is important!
Even with the VA loan—which can be zero down—you will be expected to pay closing costs unless the seller agrees to cover all of them in the purchase and sale agreement.
You can expect to pay 2%-3% of the purchase price for loan closing costs. On the high end closing costs could be as much as 5% of the purchase price in more affordable markets. Just make sure you ask your lender and title company for an estimate and then be prepared to pay these closing costs.
You can negotiate these out in the purchase and sale agreement, or after seeing the inspection report, but it is better to have the money, and not need it…than need the money, and not have it.
6. Cash to close
I would suggest having an additional 1% of the purchase price on hand in the event of any unexpected expenses that might arise close to closing.
This is a good practice anyway because having some cash in reserve for maintenance is a smart move for any property you are purchasing.
7. Asking the seller to repair everything on an inspection report
This is more of a psychological thing than anything else.
Often, when first-time homebuyers get their inspection report they see all sorts of random things listed on it. Understand that while it is normal to try and negotiate a little based on repairs that are needed, you won’t get everything on the list fixed.
I generally choose 5-6 of the items listed as “warning” or coded red/yellow on the report, and then use all of the small repairs as leverage to say “I’m not asking for all of these items” whenever they counter what I’m asking for the seller to repair.
Your agent will be able to walk you through all of the different creative ways to things repaired—or receive money for the items that need repairing—but don’t get so wrapped around these items that you are unable to come to an agreement with the seller.
The bottom line is this…
The vast majority of the time you go under contract you will end up buying the property. In fact, at the time of writing this, I have completed over 50 residential real estate transactions and have not had a single one fall out of contract due to an issue on my end!
The few that I have had to fall out of contract were oddball off-market deals where the title wasn't clear, and there were issues that essentially forbid the seller from…well, selling. For example, on one of the 3-4 properties that I've had fall out of escrow like this, I got a phone call from the seller's bankruptcy attorney 8 days before closing to inform me that the seller was mid-bankruptcy and not legally allowed to sell the home, hahaha.
You should have nothing to worry about, but make sure you are communicating with your lender and agent regularly in order to ensure you have your ducks in a row.
Prepare for the worst but expect the best – ask about what to budget for closing costs, and ensure you have those funds easily accessible as a reserve for any eventuality!
If you found this list of first time home buyer tips helpful please share it with somebody getting ready to buy their first home!