3 biggest money mistakes first-time buyers make

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For the past several years, it's been a buyer's market. Prices dropped every quarter and no one knew whether to buy or sell or sit tight.

Over the past eight months or so, things have changed. As a broker who has witnessed some exciting bidding wars that could only have one happy buyer, I can attest that you need to be fast on your feet and financially prepared - able to account for every last penny.

If you are a first-time buyer, especially, it pays to avoid several common financing errors if you want to win the house of your dreams.

Mistake #1 - Waiting too long to work on your credit

In order to get the best interest rates possible and avoid punitive FHA insurance premiums, homebuyers need a FICO score of at least 740. It can take some time to build up that kind of credit, but there are strategies for doing so, says Steven Bloom, a loan officer with A&N Mortgage in Chicago. For example, a mortgage broker might tell a buyer to pay off a certain credit card, or open a $2,000 credit line while keeping the balance at zero.

"If they wait until it's time to get pre-approved, and their credit scores are 675, then it could take another 30-90 days to improve their scores," says Bloom.

Many homeowners wait until they're about to put an offer in to get pre-approved - another mistake - only to find out they don't qualify for the rate they thought they did and can't actually afford the home, which brings us to...

Mistake #2 - Waiting too long to get pre-approved

Many buyers have noticed the market shifting, but the word hasn't gotten around to everyone yet. So, for the record: although prices and rates are still low, many neighborhoods in Chicago are sellers' markets.

One more time: it's a seller's market out there. Why? Because there are more people who want to buy well-priced homes than there are well-priced homes. It's that simple. The market times for homes have been falling for months now in most Chicago neighborhoods, and we're now sitting on as little as four months of inventory in some areas.

So how to you snag your dream home amidst all that competition? By making your offer stand out in more ways than just the price. By being pre-approved in advance so your agent can submit your offer quickly before someone else eats your lunch. And listing agents are smart. They know the difference between the back-of-the-envelope pre-approval some lenders are giving out and the thorough letter that says this buyer can buy a house. According to Dan Kreuger, a loan originator with BMO Harris, your lender should:

*Pull your credit report, all three bureaus, and go through the report to look for any red flags.

*Verify your income. The lender should ask you to bring your two most recent year-to-date paystubs, and two years of w2's to determine if you have income sufficient to support the cost of the home. If you are self employed, or have fluctuating income, the lender may also ask for your last two years of tax returns. You may want to have these ready just in case.

*Verify your financial assets: A lender should ask to see 60 days of bank statements for all of your financial assets. They should verify that you have enough money set aside for the down payment, closing costs, and required reserves.

*Many times, the lender will also run these figures through an automated underwriting system to confirm you eligibility.

Mistake #3 - Taking the credit card to Bloomingdale's before closing

This one is a heartbreaker. You've cleared all the hurdles: the exhaustive search, the negotiations, the inspection - you even got your mortgage approved. Then, right before closing, the bank runs your credit again. They see that you just spent $6,000 on new furniture, raising your debt to income ratio, dropping your credit score, increasing your mortgage rate...and leaving you unable to afford your new payment. Yikes. You don't want make that call to the Bloomingdale's delivery department - just wait until you close to pick out the perfect new sofa.

There are plenty of pot holes on the road to financing your new home, but working with a good lender, you should be able to avoid most of them.

Bottom line: Be prepared.

Mike McElroy is the owner of Access Chicago Realty, Inc., in Lakeview, which assists buyers, sellers, renters and investors in Chicago.