1. Skipping Mortgage Preapproval
Looking for your dream home may be fun, but don’t do it until you have spoken with a lender and have been preapproved for a mortgage. In most competitive market areas, like the Chicago metro area, having a preapproval letter will keep your place in line for being considered a serious home buyer. It would be a shame to let the perfect home slip away because you haven’t secured your financing.
2. Buying a Home Beyond Your Means
Many homebuyers have found themselves in the same risky situation. There’s a common misconception that you should get the most expensive mortgage you can qualify for because property prices will increase, maximizing your investment. But you may end up with a monthly mortgage payment that’s out of your budget.
Your lender will tell you the loan amount that you qualify for, but that does not necessarily mean that you can afford the monthly payments associated with the loan. Your mortgage preapproval is based on your debt-to-income ratio (DTI), a formula that determines how much of your monthly income goes to paying bills. It does not cover all of your costs and expenses, especially unforeseen ones such as medical expenses, increased inflation, and all the issues that tend to give us headaches. Create a realistic budget and focus on your monthly payments rather than your preapproval amount. Be sure to include not only the costs and expenses of the real estate, such as, utilities (water, gas, electric), taxes, HOA fees, insurance, but all of the costs and expenses that you incur and any potential increase. Also consider the possibility of losing an income source and what you would do if this occurs.
3. Assuming That Your Income Will Increase
It is natural to assume that your income will increase in the future. You may think that even though it is difficult to pay the bills now, your future increase in earnings will solve any current financial hardships. Although that may not be an unreasonable assumption, unforeseen circumstances like COVID and high inflation may quickly shatter your anticipation of an income increase in the future. Instead use your current income in all future projections and if your income increases, the better off you will be.
4. Omitting the Home Inspection
To be more competitive, buyers have waived the home inspection process. Never skip a home inspection or purchase a property sight unseen. Hidden defects such: as foundation, plumbing, and roof leaks; faulty electrical wiring; leaking furnace; radon; mold; and structural defects may quickly add tens of thousands of dollars to your real estate purchase. Not only may a hidden defect add considerable cost to the purchase price, but it may also harm or kill you. A good inspector will notice potential problems that you, the untrained lay person, will not see. A good inspector will look beyond the glitz to uncover hidden defects and dangerous conditions. You may need several inspectors such as general, plumbing, HVAC, radon, and structural, but in the end, it may be the best money that you have spent.
5. Spending All Your Savings
Ever heard the term “house poor”? It describes the unfortunate situation of owning a home that’s more expensive than you can reasonably afford. Spending all of your savings on your dream home and not having a “rainy-day fund”, could lead to disaster. Have you thought about what you will do if you find out that you need a new roof or that you have another unforeseen major expense? What about if you get laid off? How will you make ends meet? So, while the dream home that you have always wanted may be within your reach, a scaled-back version may be a better choice.
6. Not Factoring in Closing Costs
Closing costs can add 2%-5% to your purchase price. These costs may include mortgage insurance, escrow costs, appraisal fees, title costs, lender fees, realtor fees, application fees, loan origination fees, property taxes, and more. Be sure to include the closing costs in the budget to purchase your home.
7. Signing a Listing Agreement Before Your Properties Lawyer Reviews it.
Let’s say that you have decided to sell your house located in Schaumburg. Unless you are selling the property “By Owner,” a logical next step is contacting one or more realtors. Once you decide on a realtor, the realtor will want you to sign a listing agreement. Never sign a listing agreement without first having your real estate closing lawyer review it.
A listing agreement is a contract between you and the realtor containing unfamiliar terms and legalese outlining each other’s rights and obligations including the length and term of the agreement, commissions and fees, marketing, title insurance, dual agency, ancillary services and many more. One glaring difference often seen between a listing agreement and a real estate contract is that a real estate contract usually has an attorney review provision and a listing agreement does not. Attorney review will flush out terms unfavorable to you and allow your attorney to modify the agreement. If you sign the listing agreement before your real estate attorney has reviewed it you are stuck with the terms and have no opportunity to modify the agreement.
8. Allowing a Realtor or Other Third Party to Order Title And Closing Services.
Title insurance protects the buyer, the seller, and the lender, from loss. The title insurance company assumes certain risks that would otherwise fall on the buyer, the seller, or the lender. They assure that a seller can sell the property and a buyer can purchase the property. The cost of title insurance can be determined by looking at rates published by the title insurance company. The rates that a title company charges are the same no matter who purchases the policy, whether it is you, your realtor or your properties lawyer.
Most real estate attorneys in the Chicago Metropolitan area are also agents for various title companies. When selling your property, they research the ownership and uncover possible title defects in the property being sold. The title company pays the closing attorney a fee for the title services they perform and, in turn, most closing attorneys reduce the fee they would otherwise charge their clients. In the Chicago area, a real estate attorney typically charges a flat fee (usually $200-$450) to represent a seller. However, allowing a realtor or third party to choose title services for you will not reduce the title insurance premium that you will pay, but will take away your attorney’s incentive to pass on savings and offer you a low, flat fee. Hiring a flat fee, real estate closing attorney who is also a title company agent, gives a Chicago area seller, the “biggest bang for the buck.”
9. Skipping a Flat Fee Properties Lawyer.
Again, in the Chicago area most real estate attorneys are also agents for the various title companies. Since they are paid by the title company for the title work they do and the insurance risk they take, most real estate attorneys charge a low, flat fee to represent a seller. However, some attorneys think it necessary to charge an hourly fee, greatly increasing your out-of-pocket costs. Skip the Chicago area attorneys charging an hourly fee for your real estate transaction.