Purchasing your first home can be scary and confusing as well as exciting. There are dozens of decisions to be made and if you are not careful you may make a mistake that you will have to live with for years.
If you are in the market for your first home, or have been in your current home for decades and just need a quick refresher, we have you covered.
Here are 10 mistakes that many first time homebuyers make and how to avoid them:
Not Applying For a Mortgage First: Always talk to a mortgage lender before you start shopping for a home. This will give you a leg up on your competition. This is especially true in tight markets where houses go quickly.
In addition to showing a seller that you are serious and ready to buy, getting pre-approved for your mortgage will give you a realistic budget so you know exactly how much home you can actually afford.
Not Shopping Your Mortgage: While it may be easy to use your bank for your mortgage, not shopping around can be a huge mistake. Interest rates and fees can vary dramatically between lenders so it is a good idea to shop around when getting a mortgage.
Industry experts recommend shopping at least three lenders and one or two independent mortgage brokers. It doesn’t always pay to go with the lowest interest rate, always consider the customer service factor as closing on a home can be filled with surprises, chose a mortgage lender who will help guide your through the process.
Using All of Your Savings:There will most likely be a few surprises once you move into your home and if you have used up all of your savings on a down payment and closing costs you could end up in trouble if an unexpected repair pops up.
Putting down 20 percent means you can forgo mortgage insurance which will definitely lower your monthly costs but if getting to 20 percent drains all of your savings you are better off putting a bit less down and paying mortgage insurance for a few years. Being house poor is never fun.
It is best to have three to six months of living expenses in an emergency fund. This ensures you won’t have to sell your home if an unexpected job loss occurs or a major repair pops up.
Overspending on a House: It is pretty easy to find the house of your dreams that is well above your budget but overspending on your home can quickly lead to financial troubles if unexpected repairs come up or a car needs to be replaced. It also means that eating out, going to a movie or taking a vacation can be out of reach.
It is best to stay within your budget and purchase a house that comes with a monthly mortgage payment you can actually afford. While you may qualify for a $400,000 mortgage that doesn’t mean you can actually afford the monthly payment. Consider all of your monthly bills when calculating the monthly mortgage payment you can afford, including new bills that will come with the home such as property taxes and homeowners insurance.
Bad Credit Rating: Once you have been preapproved for a mortgage it is time to take a break with the credit cards. Hitting the furniture stores and running up some major credit card bills can put your closing in jeopardy.
Lenders will pull your credit report again right before closing to ensure nothing has changed in your financial situation. If your credit report shows lots of activity or your credit score has dropped, they may pull your pre-approval putting your closing at risk.
Curtail spending and work hard to keep your credit rating at the same level it is at when your first received your pre-approval. This will help make sure that your closing goes as planned.
Don’t open any new credit cards, close any existing ones or take out other loans such as a car loan before closing on you new home. If possible pay down any existing balances and make sure you pay all bills on time.
Holding Out for Perfection: While everyone wants to find the perfect house, it just doesn’t exist. In most cases, you will need to compromise about certain aspects of a home. You may need to consider neighborhoods that are not your first choice, choose a house that is smaller than your ideal size or consider a home that needs a bit of work.
Always keep an open mind when shopping for a home and try to imagine what a house could be after a bit of work. Don’t be afraid of putting in some sweat equity and remember that some mortgages allow renovation funds to be rolled into your monthly mortgage payment.
Underestimating the Cost of Home Ownership: It’s not just your mortgage payment you will have to consider, homeownership comes with a variety of expenses that you need to consider before making a final decision on a house.
Just a few expenses you will need to consider are property taxes, mortgage insurance, homeowners insurance, hazard insurance, any repairs that crop up, routine maintenance as well as utilities.
If you don’t take these expenses into account you could quickly end up in the red and lose your home. Always factor in expenses such as taxes and utility bills as well as getting a quote for homeowners insurance to make sure you can afford the premium. Keep an emergency fund in an interest bearing account to make sure you have enough money to cover any unexpected repairs.
Not Considering the Neighborhood:Even if you absolutely love a house, if it’s in the wrong neighborhood you should keep shopping. Buying the perfect house in a city or town that you don’t love is a recipe for disaster.
Moving into a city with a high crime rate can lead to expensive homeowners insurance not to mention having to worry about your family’s safety. A location that is a long commute from work will quickly become old as you spend most of your life in a car. If you have kids or plan on having children you should certainly look at the school district as well.
Choose an area that you want to live in and search for homes within those boundaries. Visit at different times of the day to get a feel for the neighborhood as well as traffic. Check commute times and look at crime stats.
Making Emotional Decisions: There is always a bit of emotion when it comes to choosing a home but you can’t let your heart overrule your head. This is especially true when it comes to pricing, an emotional attachment can result in you putting an offer on a house you simply cannot afford.
A house is one of the biggest investments you will make in your lifetime so make sure your head is in the game when you make a final decision. Set a budget and stick to it.
Not Considering Government Loans:First time homebuyers can be cash strapped and a traditional loan may be too expensive or difficult to get approved. Government backed loans such as a Federal Housing Administration (FHA loans), U.S. Department of Veterans Affairs (VA loans) and U.S Department of Agriculture (USDA loans) are often easier to qualify for and come with great interest rate.
In most cases, these loans often require a smaller down payment. As an example, a FHA loan requires a 3.5 percent down payment as long as your credit score is 580 or above. You will need to carry mortgage insurance on these types of loans but in most cases the advantages far outweigh the disadvantages.