6 Biggest Mistakes Homebuyers Make

Buying a home is usually the largest purchase an American taxpayer will ever make, but it can also be one of the most confusing. As any one who has ever owner property can attest, there are many decisions to be made and what seems like hundreds of documents that must be signed. To help potential homebuyers rushing to purchase a house before the federal tax credit deadline, CNN Money has composed a helpful article explaining the 6 biggest mistakes to avoid.

1. Not knowing your credit score

If you're even toying with the idea of buying a home, you must know your exact FICO score. If you find it is less than ideal, wage a systematic campaign to raise it. Too many borrowers ignore this step and get surprised when they get interest rate quotes.

Once you've pored over your credit history and corrected any errors, your next step is to pay down revolving debt balances to no more than 30% usage. That will help raise your score significantly.

Why does it matter?

The lower your score, the higher your costs of borrowing. Fannie Mae and Freddie Mac, for example, charge higher up-front fees to borrowers with credit scores below 740.

For a buyer with a credit score between 680 and 700, the fee comes to 1.5% of the mortgage principal. On a $200,000 mortgage, that adds up to $3,000. Someone with a 740 score pays nothing.

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Californians get Improved $10,000 Home Buyer Tax Credit

My home state of California recently extended a home buying credit that had expired last year. The bill (AB 183) was signed into law by Governor Arnold Schwarzenegger and is due to take effect on May 1^st, 2010. According to this article on The Californian.com, the law extended the credit to all homebuyers, not just first-time homebuyers.

"I have been up and down the state pushing this important housing bill that will get people off the fence and into homes while creating jobs and stimulating our economy, and today I am proud to take action and put it into law," Schwarzenegger said at the legislation's signing ceremony last month.

The new law's $200 million allocation is split 50/50 between eligible first-time home buyers who purchase an existing home and anyone purchasing a new home. First-time buyers are defined as those who have not owned a home in the past three years.

Unfortunately, the immediately obvious flaw in California's home-buying carrot is that it takes effect May 1, the day after the existing and also expanded federal home-buyer tax credit is scheduled to end.

When both the California and federal home buying tax credits were available simultaneously, Californians struck a tax credit motherlode — total tax credits of up to $18,000.

The first $100 million tax credit, approved in February 2009, was only for first-time home buyers who purchased new homes. Funds ran out after just four months, with 10,659 Californians claiming the credit, according to the Franchise Tax Board.

Home-Purchase Index in U.S. Plunges to Lowest Level Since 2000

From Bloomberg.com:

Mortgage applications to purchase homes in the U.S. plunged last week to the lowest level in almost nine years as Americans waited for the outcome of deliberations to extend a government tax credit.

The Mortgage Bankers Association’s index of applications to buy a house dropped 12 percent in the week ended Nov. 6 to 220.9, the lowest level since Dec. 2000. The group’s refinancing gauge rose 11 percent as interest rates decreased, pushing the overall index up 3.2 percent.

The drop in buying plans points to the risk that the recent stabilization in housing will unravel without government help. In a bid to sustain the recovery, Congress passed and the administration signed a bill last week to extend jobless benefits and incentives for first-time homebuyers, adding a provision that also made funds available to current owners.

“Uncertainty over the housing tax credit sent some tremors through the market in recent weeks,” Michael Larson, a housing analyst at Weiss Research in Jupiter, Florida, said before the report. “But now that Congress has extended and expanded the credit, we should see demand pick back up.”

The MBA’s overall index climbed to 627.5 last week from 608.3, the banking group reported today in Washington. Its refinancing gauge increased to 2998.2 from 2693.7.