Houston - Credit experts say some homebuyers are hurting their credit and finances by overpaying for houses in this red hot real estate market.
Redfin reports that 54% of homes sold above their list price in May. Many buyers are taking on more debt not only to buy a home, but also to fix it up.
"We’re in what we term an insane real estate and housing market," said Carlos Medina with credit monitoring company ScoreSense.
That "insane" market is leading more younger, first time homebuyers to overpay for a house, or buy fixer uppers, and then need more money to make repairs, Medina said.
"So in most cases, people are putting themselves in a very precarious credit situation, extending themselves beyond probably their current capacity," he explained.
Medina, who also worked for 11 years at the credit bureau Experian, says to be better prepared to buy a home, buyers should start improving or repairing their credit reports a full 12 months before applying.
And pay down debt, not just to a goal of 30% of your available credit, but at least 30 days before you apply for a mortgage. He says that's because your credit score is usually updated monthly.
"Having been in a credit reporting agency as well, I can tell you that’s a safe bet, that your scores and reports will be updated at least by the middle of each month," said Medina.
He says only apply for mortgages within a 14-day period, and don't open new credit cards or car loans during that time or before closing on a house.
"It might even have you lose your home in terms of your ability to get that mortgage because they’ll check your score again right before you close," explained Medina.
If you're deciding whether to add any extra money you have to your down payment or to pay down debt, he says pay down debt. It'll lower the cost of your mortgage.
Fannie Mae points out some loans for first time homebuyers require only a 3% down payment.
"Including Fannie Mae’s HomeReady program. It only requires 3% down and supports scores as low as 620, and includes other flexibilities that many of these homebuyers don’t realize are available to them," said Katrina Jones, Fannie Mae’s Vice President of Racial Equity Strategy & Impact.
Fannie Mae just launched a new tool to help first time homebuyers prepare to buy a house and dispel myths about the process, called Your Own Story.