7 Rookie Mistakes Not to Make When Buying a House
Whether you're a first-time homebuyer or someone who has bought a house in the past but needs a refresher, today we're discussing what not to do when buying a home. These rookie mistakes will cost you time, money and unnecessary stress so be sure to read up on these rookie home-buying mistakes and be sure not to make them when it comes time to purchase your home.
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Now, back to seven critical mistakes to avoid when purchasing a home. But first, a little homebuyer humor.
People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30-year mortgage.~Doug Larson, Cartoonist & Columnist
Mistake #1: Equating affording a mortgage as being the same as affording a home.
First-time homebuyers often feel ready to commit to homeownership when they are comfortable with the idea of paying a mortgage every month and being able to afford it. But that's only one slice of the home ownership pie.
Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time homebuyers tend to overlook when shopping for a place to call home. Some of these costs have a tendency to go up every year, particularly property taxes and insurance, so be sure you can afford the potential increases later. And then there are home improvement costs, maintenance expenses, and other surprises that can crop up along the way. Once you factor in all of these costs, you are then being realistic about whether or not you can afford owning your own home.
✔ How to Avoid This Mistake: Start by totaling up all of the monthly costs associated with a home purchase, including your projected mortgage payment, tax and insurance estimates, HOA fees and home maintenance costs. And don't worry if you don't have concrete numbers—the point is to see if you can afford a ballpark amount. If the sum of the expenses equals more than what you're paying for housing now, then subtract your rent from the total. The difference is what you should consider transferring to your savings account for a few months to simulate what you'd be paying out to cover your monthly new-home costs.
Mistake #2: Shopping for a home before shopping for a mortgage.
As a general rule of thumb, potential homebuyers should be looking at homes that are 2-3 times their annual income. But before you begin shopping for homes, you should be getting pre-qualified and pre-approved for a mortgage. What's the point of looking at houses that are not within your price range? It makes sense to first lay out your financial situation on the table and let the lender give you the numbers you have to work with. That may not be as fun as heading out and looking at homes, but it does help you stay focused on making a smart financial decision instead of an emotional one.
✔ How to Avoid This Mistake: Talk to a mortgage professional about getting pre-qualified or even pre-approved for a home loan before you start to seriously shop for a place. The pre-qualification or pre-approval process involves a review of your income and expenses, and it can make your bid more competitive because you’ll be able to show sellers that you can back up your offer.
Mistake #3: Spending your life's savings on a downpayment.
Spending all or most of your savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make. Homeownership inevitably comes with a few surprises, so go ahead and expect the unexpected. If you buy a previously owned home, unexpected repairs start cropping up pretty quickly. If your budget is too tight or you've used up all of your savings just to purchase and make payments on the home, you could quickly find yourself in a hole financially. You don't want that, obviously.
✔ How to Avoid This Mistake: Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the financial edge. “I’d take paying for mortgage insurance any day over not having money for rainy days,” says New York attorney Rafael Castellanos, president of Expert Title Insurance. “Everyone—especially homeowners—needs to have a rainy-day fund.”
Mistake #4: Not looking into first-time homebuyer assistance & other loan assistance.
As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs. But don’t make the error of assuming that you have to delay homeownership while saving for a huge down payment. There are plenty of low-down-payment loan programs out there, including state programs that offer down payment assistance and competitive mortgage rates for first-time home buyers. Yes, 11% of millennial homeowners say they regret not making a bigger down payment. But the vast majority don’t express such a regret.
✔ How to Avoid This Mistake: Ask a mortgage lender about your first-time home buyer options and look for programs in your state. You might qualify for a U.S. Department of Agriculture loan or one guaranteed by the Department of Veterans Affairs that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.5%, and some conventional loan programs allow down payments as low as 3%.
Mistake #5: Not checking your credit report for accuracy.
Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.
✔ How to Avoid This Mistake: You may request a free credit report each year from each of the three main credit bureaus. You should also dispute any errors you find and make sure they are corrected.
Mistake #6: Applying for new credit, loans, or changing your debt-to-income ratio before the home sale is final.
You have pre-qualified for a loan. You found the house you wanted. The contract is signed and the closing is in 30 days. Don’t celebrate by financing another big purchase. Lenders pull credit reports before the closing to make sure the borrower’s financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing. Buyers, especially first-timers, often learn this lesson the hard way.
The lender’s mortgage decision is based on your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments. Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio. Neither of those is good from the mortgage lender’s perspective.
✔ How to Avoid This Mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. It’s OK to have all those things picked out ahead of time; just don’t buy them on credit until after you have the keys in hand.
Mistake #7: Going it alone instead of enlisting the help of real estate professionals.
New to the home-buying game? You’ll need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer. Venturing into this process alone, without professional help, is not a good idea. New buyers normally don't know what to expect, nor have a good grasp on the ins and outs of the home-buying process.
✔ How to Avoid This Mistake: Finding trusted professionals to help you along the way is a wise move. While every rule has its exception, generally, first-time homebuyers should not try to deal directly with the listing agent since they are only going to show you their listings. You should find a buyer’s agent to help you. Also endeavor to seek independent, unbiased advice whenever possible.
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”~Franklin D. Roosevelt, U.S. President