Buying your first home is what you have been daydreaming about for months if not years. Your favorite daydream is a sunny Saturday afternoon watching the kids run through the sprinkler on your freshly mowed lawn. And there is that pestering feeling of being a little overwhelmed with the big decisions you face about the biggest purchase you’ll ever make. Fortunately, many people have been where you are today and you can learn from their mistakes.
Here are the biggest mistakes first
time buyers make and how you can avoid them.
you need a 20% down payment to buy your home. This is a huge myth built
on a single partial truth that applies to a small number of first time buyers.
The partial truth is buyers who are taking out a conventional loan can avoid
paying private mortgage insurance by making a 20% down payment. But the fact is
that almost everyone (including those taking out a conventional loan) qualifies
for a mortgage with much less than a 20% down payment. Popular first time mortgage
programs are FHA, VA, and USDA loans - not conventional loans. You can get some
VA loans for 0% down and most FHA loans start at 3.5% down.
checking your credit report and making easy corrections. Your
credit score, down payment, and steady income are the biggest keys to obtaining
a mortgage. The higher your credit score, the more favorable the mortgage you
will qualify for. That better mortgage can enable you to buy a better home and
maybe in a better neighborhood. The fact is that about one-quarter of credit
reports contain errors that can be easily corrected. Our blog, “Tips
for Improving Your Credit Score to Buy a Home” provides
helpful information to raise your credit score.
involving a real estate agent soon enough. About 90% of buyers begin
their home search on the internet and that can be very useful. There are apps
and calculators to help lookup credit scores, understand mortgage calculations,
monitor interest rates and a lot more. But none of this is a substitute for a
real estate professional that helps navigate the entire process. Agents point
you to solutions if you do run into problems. They help you understand what
neighborhoods and which houses are in your price range. It’s their job to stay
up to date with changes in the multiple listing system. They help you structure
offers in a very competitive market and much more. The sooner you engage with a
real estate agent, the sooner they will be helping you work through the process
faster and for the best results.
deciding how much house you can afford. Too much house makes for
nice daydreams but can cause you to waste a lot of time. You’ll almost
certainly spend time looking at houses that are out of your price range as a
first time buyer. Or you may not realize how much house you can afford and
spend time looking at disappointing houses when you can do better. Deciding how
much you can afford is a two-step process. First, learn how much you qualify
for using an online calculator or being prequalified with a broker (prequalifying
comes before preapproval). Then create a personal budget to determine what you
are comfortable paying each month. This can be looking at what is most
affordable, reasonably affordable, and what would be a stretch for your budget if
you qualify for a higher mortgage.
the first mortgage rate quote. This is a biggie because you’ll be paying on your mortgage
for many years to come. There are a lot of variables besides
the interest rate in different mortgage programs. Unfortunately, the Consumer
Financial Protection Bureau estimates that about half of homebuyers never shop for a
loan. Besides interest rates, you want to consider multiple loan programs that
include VA, USDA, and FHA. You also need to understand the small print that
might require that you pay points to obtain a lower interest rate.
about closing costs and moving expenses. The down payment is a big
nut to crack and some people forget to calculate the other costs that are
involved when buying a home. Other closing costs include appraisal fee, home
inspection fee, prorated property taxes, homeowner insurance, title insurance,
and possibly legal fees. There might also be others. These can add up to $6,000
or $7,000 on a $200,000 home. A few can be wrapped into the balance of your
loan and paid over time but some cannot. Be sure you know ahead of time how
much you’ll need to bring to the closing table along with the down payment. One
way to minimize most prorated costs is to close as near the end of the month as
you can. If you are currently renting, you won’t have to pay the rent at the
beginning of the month and your first mortgage payment won’t be due until the
end of the next month. Closing near the end of the month can save you about one
month in housing costs. And don’t think moving into a new home is free. Even if
you have friends with pick-up trucks, it will still cost you several hundred
dollars. Surprise expenses will also come up. It’s a good idea to have an
emergency or reserve fund beyond your down payment and closing costs.
for credit before the sale is final. Just because you’ve been preapproved or even fully approved
for a loan doesn’t mean it can’t be canceled. A day or a couple of days before
the final closing, your lender will take another look at your finances. This is
not the time to be applying for a new credit card or buying anything on credit.
You need to leave everything alone that has qualified you for the loan. If you
are right on the cusp for qualifying, even a big dinner out on your credit card
could cause you problems. Even if your approval isn’t canceled, using credit
shortly before the closing can cause your interest rate to go up or a delay in the
closing while the lender takes a closer look at your finances. It’s best to
leave your finances as stable as possible between the time you are approved and
the final closing of your home purchase.
Please leave your comments about mistakes
that first time buyers make and how to avoid them.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].
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