TOP 10 FIRST-TIME-HOMEBUYER MISTAKES TO AVOID
Buying a home for the first time is often as overwhelming as it is exciting. It’s easy to get caught up in the excitement of it all and make mistakes. Home ownership is a huge commitment. Don’t go into it without doing your homework. Here are 10 mistakes commonly made by first time homebuyers that will cost you, both financially and emotionally.
1. Failing to prepare
It’s common for people to get ahead of themselves after deciding they want to buy a home. Many fail to lay the groundwork necessary and start looking at houses before they have money for a down payment or even know what their credit scores are. This will waste not only your time, but the seller’s and the Realtor’s time as well.
A better idea is to sit down and prepare a timeline for home ownership. You should determine how much money you have every month to set aside for a down payment. You must know what your credit score is and make sure the information on the report is correct. If it’s not correct you have to take steps to fix it. If your rating isn’t what it should be, you have to repair it and be realistic about how long the process may take. Once you have saved enough for the down payment and have a healthy credit score you will be in a much better position to get pre-approved for financing.
2. Looking at homes before getting pre-approved for financing
It’s very tempting for first time home buyers to start looking at houses before seeing a lender. Without knowing how much money you can borrow you may waste time looking at houses you can’t afford. You can lose a house you’ve fallen in love with because your financing isn’t in place.
Before you begin your search you need to sit down with a lender and start the approval process. You will need fully underwritten pre-approval. This will make any offer you present to a seller much more competitive in the event there are multiple buyers bidding on the same property. Sellers are a lot more willing to work with buyers they know are serious.
3. Meeting with just one lender
It’s a big mistake to assume all lenders are the same. You wouldn’t have major surgery without getting a second or third opinion. You shouldn’t talk to just one lender before you buy a house. Shopping around will allow you to compare rates, fees, and loan terms. Consider a mortgage broker. Good customer service and responsiveness to your needs are important considerations.
4. Assuming a 20% down payment will be required
Most first time home buyers assume they have to put down 20% in order to get a loan. This is a myth. 20% down is great if you have it. You may avoid paying private mortgage insurance that way. According to the National Association of Realtors the average down payment is 13%. It can be much less though. You can get a conventional mortgage with as little as 3% down with mortgage insurance and may qualify for some government loans with no money down.
5. Overlooking government loans
First time buyers strapped for cash and with less than perfect credit often assume home ownership is out of their reach. This isn’t necessarily true. Conventional loans are not the only option. The Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and U.S. Department of Agriculture (USDA) offer loan packages that require little or no money down.
There are FHA loans available to qualified purchasers with a 3.5% down payment. They require a minimum credit score of 580. These loans do require the purchaser to pay mortgage insurance annually and an upfront premium equal to 1.75% of the base loan amount (as of 2018) at closing. The upfront premium may be rolled into the loan.
The VA offers active duty military, retired military, and their spouses loans with no money down. There may be a funding fee though. VA loans are made through private lenders. The fees these lenders can charge have a cap to keep borrowing costs reasonable.
If you live in a rural area you may qualify for a USDA loan. These loans are designed to help low to moderate income buyers become homeowners. Depending on your income there may be no down payment requirement. To be eligible you have to purchase a home in one of the areas designated USDA eligible. You also have to meet the income requirements.
6. Making changes that affect credit
Some first time home buyers assume that pre-approval for financing assures them of a loan. They put a big purchase on a credit card without realizing that the lender is going to check credit again before closing. This can put home ownership in jeopardy. A major purchase made on credit can negatively impact your credit rating and your loan to debt ratio.
You don’t want to make credit changes after getting pre-approved for a loan. Don’t open new credit accounts or put major purchases on a card. You must continue to keep your credit balance at least 30% below your limit and keep making monthly payments on time.
7. Fixating on an ideal
A lot of first time home buyers have an idea in their heads about the perfect home, and they aren’t willing to settle for anything else. Having such a narrow view causes buyers to overlook real possibilities. It’s much better to keep an open mind and consider homes with potential instead. You might end up with a jewel because you were willing to do some renovating.
8. Making emotional decisions
Falling in love with a house can be a costly mistake. It’s easy to get attached to something and overspend because you’re afraid of losing it. A house is a huge investment. It may be difficult, but it’s important to keep your emotions in check. You have to stick to your budget and be willing to walk away if the price or the terms are too high.
9. Underestimating the value of a good neighborhood
You can find a great house, but if you end up hating the neighborhood you won’t be happy in it. A good Realtor can guide you to areas with low crime rates and good schools. Before you buy a house you should spend some time in the neighborhood. Driving or taking a walk down the street at different times of the day will help you get a sense of what life will be like if you decide to move in. You should also keep in mind that the kind of neighborhood you buy into will affect the market value of your house if you ever decide to sell.
10. Underestimating the cost of owning a home
The cost of owning a home is more than just your monthly mortgage payment. When you are planning your budget, you have to take homeowners insurance, property taxes, association fees, maintenance and repairs, utilities, and more into consideration. There has to be enough cushion in your budget for you to stay in the black every month. 1% to 3% of the purchase price is a reasonable amount to put aside every year for unexpected, house related expenses.
Buying your first home should be exciting. Becoming an informed buyer will increase the chances that you find a great home at a competitive price with terms that are within your budget. It will also reduce your risk of making a costly mistake and suffering buyer’s remorse.