Getting your first home can be as frightening as it can be exciting, and it comes with many big decisions. During the process, you can make mistakes that could leave you in a sorry situation later.
If you’re buying a home for the first time or it has been a decade since you bought your last home, knowing the market can help you to a great extent. When I purchased my first home almost two decades ago, I was confused as well and made some common mistakes that could have been sorted out with the help of an expert. Below are some tips to help you ease that stress and avoid those common mistakes you can make as a first-time homebuyer.
Forgetting to factor in essential costs
Most first time home buyers think because they can afford the mortgage payments, they should get their new home. However, this is not the only cost they will pay. Remember if you are planning to buy your first home, you should also include other expenses such as taxes, HOA dues, property insurance, utility bills, and time to time maintenance.
So what should you do? Your real estate agent or lender can assist you in calculating those costs. Shop around to get comparative quotes for insurance coverage and plan to save at least 2-3% of the purchase price of the house per annum regarding those expenses.
Forgetting to check your credit score
Your credit score can provide a lot of information to your lender. With your credit report, lenders want to make sure that you’re financially responsible and show that you’ll be able to pay your loan comfortably in the future. It’s one of the critical criteria used by lenders when approving you for a mortgage.
So what should you do? You should close existing accounts and should not go for new credit cards, take out new loans or stress out your current credit card limit by purchasing big, especially just before applying for a mortgage. It would help if you pay your bills promptly and pay down your current credit card debt to at least 30% or lower.
Engaging with only one lender
As a first-time homebuyer, you might secure a loan with your first ever lender, but you might be paying thousands of dollars extra in payments. The more you search around and compare different lenders, the better the chance that you will end up in a good deal.
What should you do? It would help you greatly if you shop around and compare at least 3-4 different lenders along with a mortgage broker. Compare interest rates, lender fees, and loan terms. Don’t ignore the responsiveness of the lender and their customer service as it plays a vital role in the mortgage approval process.
Buying a house that you can’t afford
If you have found your dream home, but it’s out of your reach, stretching your budget now can lead you to a sorry state in the future. You might be at risk of losing your home if you ever face a tight financial situation in the future.
What should you do? First, determine what monthly payments you can easily manage instead of overextending your budget and going for the maximum loan limit you can qualify. For instance, qualifying for $500,000 loan doesn’t mean that you can manage its monthly payment as well. Add in your other liabilities as well when determining what mortgage you can easily afford.
Moving without planning
According to Nick Bush, a Realtor with TowerHill Realty in Rockville, Maryland, purchasing a home can be complicated, especially when you get into the weeds of the mortgage process. Rushing too fast in the process can cost you in the future.
“The biggest mistake that I see [first-time buyers make] is to not plan far enough ahead for their purchase,” Bush says. “This doesn’t allow them to save [for a down payment and closing costs], fix items on their credit report, and debunk some of the myths about the process with a realtor and lender.”
What should you do? Plan your purchase at least a year in advance. Remember that it can take months or even years to repair poor credit and save enough money to put as a healthy down payment. Try working on your credit score, settling your current liabilities, and having more cash can put you in a stronger position to get your pre-approval.
Spending your savings
Using most or all of your savings on closing costs and down payment is one of the critical mistakes you can make as a first time home buyer. Some buyers use all of their savings to reach that 20% down payment mark to avoid private mortgage insurance (PMI). However, it’s not the right decision as they are left with empty pockets.
If you are putting 20% down or more, you don’t have to pay PMI when getting a conventional loan but at the same time it’s like living on the edge.
What should you do? It would be best if you kept 3-6 months of emergency funds with you. It’s not an ideal thing to pay mortgage insurance, but it’s riskier to drain your emergency or retirement money by making a sizeable down payment.
The myth of 20 percent down payment
It’s a false belief that you must put 20 percent down payment. Although you can avoid mortgage insurance by putting 20% as a down payment, many buyers these days can’t (or don’t want to) put down that much money. As per the National Association of Realtors, the average down on the house is 13%.
Saving for 20% down to purchase your house can take many years, and it can limit your cash available that could have been used to maximize your savings for the retirement or paying down the loan with high-interest.
What should you do? You can use as low as 3-5% down payment for a conventional mortgage ( you have to pay PMI). In some cases, few government-backed loans need 0-3.5% as down. You should always check your state or local housing programs to see whether you can qualify for a first-time housing assistance program.
Ignoring FHA, VA and USDA loans
In the current environment of rising house prices and increasing mortgage interest rates, first-time homebuyers might face a shortage of cash. Because of that, it can be hard for first-time homebuyers to qualify for a conventional loan, and they might think that they don’t have any financing options available for them. It’s where the government-backed mortgages enter into the picture.
What should you do? Consider one of the three government-backed mortgage programs. These are Federal Housing Administration Loans (FHA), U.S. Department of Agriculture Loans (USDA) and Department of Veterans Affairs Loan (VA).
A minimum of 580 credit score is required with FHA loans, with just a 3.5% down payment. FHA can help borrowers with poor credit or not much money saved. The disadvantage of an FHA is that it contains mandatory mortgage insurance and is paid both at the time of closing and annually.
The eligibility for VA loan is that you or your spouse should be an active-duty or veteran military service member. VA loans don’t need a down payment, but sometimes a funding fee is required. VA loans are offered via private lenders, and it carries a cap on lender fees to keep the cost of borrowing manageable.
If you are moderate to a low-income borrower and want to buy a home in rural area, USDA loans can help you out. To be eligible, you should meet a specific income limit and should purchase a home in a USDA designated area. For qualifying individuals with low incomes, USDA doesn’t need a down payment.
Organize your gift money
You can utilize a gift from your family in most loan programs as a down payment. Not organizing gift money in the start can make the loan approval process harder for you.
According to Dana Scanlon, a Realtor with Keller Williams Capital Properties in Bethesda, Maryland; “The time to confirm that the Bank of Mom and Dad is ready, willing, and able to provide you with help for your down payment is before you start home shopping.” “If a buyer ratifies a contract to purchase a home with an understanding that they will be getting gift money, and the gift money fails to materialize, they can lose their earnest money deposit,” she added.
What should you do? If someone is offering you a gift for your down payment, have an open discussion with them about when and how much money you’ll receive. Backup a copy of the electronic transfer or check showing when and how the funds transferred into your account from the gift donor. Lenders will verify this through your bank statements and a signed gift letter.