Buying your first home requires a flurry of big decisions. The process can be both nerve-wracking and exciting. It’s easy to get caught up in the thrill of property seeking. Don’t make mistakes that could lead to buyer’s remorse later on. Focus on avoiding first time home buyer mistakes.
If you’re a first-time purchaser or haven’t bought a house in a long time, knowledge is power. It’s critical to get advice from reliable sources. Know what to expect and what questions to ask, as well as where the dangers are.
OBTAIN A PRE-APPROVAL
Before meeting with a mortgage lender, many first-time buyers start looking for a home. Because there is more buyer demand than affordable homes on the market, housing inventory is still constrained in many locations.
In such a competitive market, if you aren’t preapproved for a mortgage, you risk losing a home. You could also be blind to your own financial circumstances.
Don’t find yourself behind the eight ball if a home you admire is on the market. You might also look at residences that are out of your price range. Before you fall in love with that wonderful dream home you’ve been eyeing, get a preapproval. Being pre-approved shows that you’re a serious buyer with credit and funds that meet the loan requirements.
IT’S A GOOD IDEA TO TALK TO A FEW DIFFERENT LENDERS
First-time buyers frequently make the mistake of obtaining a mortgage from the first (and only) lender or bank with whom they speak. This can often be a mistake. The more you shop around, the more you’ll have a firm foundation on which to compare offers and pricing. This will help to guarantee you’re getting the best deal.
At least three different lenders should be contacted, as well as a mortgage broker. Compare loan terms, interest rates, and fees offered by lenders. Customer service and lender responsiveness are critical in maintaining a smooth mortgage approval process, especially since many lenders are overburdened with applications. Low interest rates have resulted in a boom in mortgage applications, with some lenders lagging behind on closings more than others. When shopping for a mortgage, our mortgage rate tables are a great place to start.
BE AWARE OF YOUR FINANCIAL SITUATION
It’s easy to fall in love with homes that are somewhat beyond your budget, but going overboard is never a good idea. With rising housing costs, it’s more important than ever to stick to your budget. You’re more likely to suffer foreclosure if you buy a property you can’t afford. Other expenditures and expenses will consume less of your monthly budget. Consider what monthly payment you can afford rather than the highest loan amount you qualify for.
Just because you satisfy the criteria for a $300,000 loan doesn’t mean you’ll be able to afford the monthly payments on top of your other obligations. Consider your full financial profile when determining how much house you can buy, as each borrower’s position is unique. Similarly, it’s vital to be completely honest about your financial condition with your lender or mortgage broker. At the end of the day, you’ll be the one to return your loan, and you don’t want to be stuck with a debt you can’t pay.
DO NOT BE HASTY
Purchasing a home can be difficult, particularly when it comes to the mortgage process. In the long run, hurrying the process can cost you money. If you rush the process, you may not be able to save enough for a down payment and closing costs. Speeding to the finish line can also prevent you from addressing credit-related difficulties that prevent you from obtaining better loan terms.
Prepare for your house purchase at least a year in advance. Remember that improving bad credit and accumulating enough money for a significant down payment can take months, if not years. On average, most buyers can only save $5,000 per year toward a home purchase. Improve your credit score, pay down debt, and save more money to put yourself in a better position to get pre-approved.
INVEST IN A NEST EGG
Devoting all or most of your resources to the down payment and closing costs is a classic first-time homebuyer misstep.
Some people pool their resources to make a 20% down payment in order to avoid paying mortgage insurance, but they’ve picked the wrong poison because they’ll wind up with no savings.
Homebuyers who put down 20% or more on a standard loan are not required to pay mortgage insurance. This usually means lower monthly mortgage payments, but the risk of living on the edge isn’t worth it.
Even after you close, keep an emergency fund of three to six months’ worth of living expenses on hand. While paying mortgage insurance isn’t ideal, depleting your emergency or retirement funds to make a large down payment is a risk that must be avoided at all costs.
CREDIT MUST BE USED WITH EXTREME CAUTION
Credit reports are reviewed by lenders during the pre-approval process and again just before closing to verify everything is in order. They’re checking to see if your financial situation has altered.
On your credit record, any additional loans or credit card accounts could jeopardize the loan’s final approval and closing. Many buyers, particularly first-time buyers, have to learn this lesson the hard way. Maintain the status quo in your finances from pre-approval to closing. Do not open new credit cards, close current accounts, take out new loans, or make big purchases on current credit cards in the months leading up to applying for a mortgage and through closing day. Reduce your credit card balances to less than 30% of your credit limit, and make sure you pay your bills on time and in full each month.
CONSIDER THE SURROUNDING AREA
Sure, you want a home that meets your needs and ticks all of your boxes. Being picky about a home’s aesthetic, according to Alison Bernstein, president and CEO of Suburban Jungle, a real estate strategy consultant, may be short-sighted if you end up in a community you loathe.
It is critical that you choose the right town for your life and that of your family. The goal is to find a location for you and your family where the local culture and values are compatible with yours. You can always improve or downgrade your home, add a third bathroom, or rebuild your basement.
You may fall in love with your home but loathe the neighborhood. Solicit your real estate agent’s assistance in researching local safety data and school ratings. Calculate your commute time, taking into account factors such as public transportation accessibility and walkability. Visit the neighborhood at different times to get a sense of the traffic, neighbor interactions, and overall vibe to see if it’s a location you’d like to call home.
AVOID MAKING DECISIONS BASED ON EMOTIONS
Buying a house is a major milestone in one’s life. It’s a place where you’ll create memories, carve out your own space, and establish roots. It’s easy to become excessively involved and make emotional decisions, but bear in mind that you’re making one of your largest financial investments.
Many first-time buyers are bidding higher than they are comfortable with because it is taking them longer than usual to find homes in this strong seller’s market.
Emotional decisions may cause you to overspend for a home and exceed your budget. Create a budget and stick to it. Do not become emotionally attached to a home that you do not own.
THERE IS NO REQUIREMENT FOR A 20% DOWN PAYMENT
The long-held belief that a 20% down payment is required is frequently incorrect. While a 20% down payment will save you money on private mortgage insurance, many buyers nowadays don’t want (or can’t) make that kind of investment. The median down payment on a home, according to the National Association of Realtors, is 12% for first-time buyers and 6% for repeat buyers. Some communities, such as co-ops, condominiums, and HOAs, may still require larger down payments, so ask your real estate agent for information and plan accordingly.
Delaying your home purchase to save 20% could take years, delaying other financial goals like expanding your retirement savings, developing an emergency fund, or paying off high-interest debt.
Other mortgage options should be looked into. A standard mortgage can be secured with as little as a 3% down payment (private mortgage insurance is required). A 3.5 percent down payment is required for some government-insured loans, but you may be able to secure a mortgage with no money down. Also, check with your local or state housing programs to see if you qualify for any first-time buyer aid programs.
SPENDING TOO MUCH TIME SHOPPING CAN BE A BAD IDEA
Unicorns are mythological creatures that can be found in both nature and real estate. Looking for the ideal house that checks all of your boxes can narrow your possibilities too much, causing you to ignore good, acceptable options in the hopes of finding something greater. Don’t let wishful thinking sabotage your search.
Perfectionism might limit your real estate search or lead to overpaying for a home. It can also prolong the process of finding a home. Keep an open mind about the options and be willing to put in some work. You may be able to include the cost of repairs in your monthly payment with some loan alternatives.
FHA, VA, AND USDA LOANS ARE ALL OPTIONS TO CONSIDER
First-time buyers may be cash-strapped in the current environment of rising home prices, and if you have little saved for a down payment or your credit isn’t stellar, you may have a difficult time qualifying for a standard loan.
You may believe you have no other options for financing and put off looking for a home. Consider one of the three government-backed lending programs available: FHA loans, VA loans, or USDA loans (USDA loans). Here’s a basic rundown of what each one entails:
A 3.5 percent down payment and a credit score of at least 580 are all that are required for FHA loans. Borrowers who don’t have great credit or a lot of money saved can use FHA loans to bridge the gap. The most significant downside of these loans is the required mortgage insurance, which must be paid both annually and at the time of closing.
VA loans are available to active-duty and retired military personnel, as well as their spouses. Although no down payment is required for these loans, certain borrowers may be asked to pay a financing charge. VA loans are offered by private lenders and come with a fee cap to keep borrowing costs low.
USDA loans are designed to help low- and moderate-income borrowers buy homes in rural areas. You must purchase a property in a USDA-approved location and meet certain income standards to be eligible. Some USDA loans may not need a down payment for qualified applicants with low incomes.
RECOGNIZE THE COSTS OF HOMEOWNERSHIP
If your new monthly mortgage and interest payment surprised you, wait until you tally up all of the other costs of owning a property. Property taxes, mortgage insurance, homeowners insurance, hazard insurance, repairs, maintenance, and utilities are just a few of the extra things to consider as a first-time homeowner.
According to a recent survey, the average homeowner spends $2,000 per year on maintenance. Not having enough buffer in your monthly budget — or a robust rainy day fund — can quickly put you in the red if you aren’t prepared.
With the help of your agent or lender, you can calculate taxes, mortgage insurance, and utilities costs. By searching around for coverage, you can compare insurance quotes. Finally, try to set aside at least 1% to 3% of the home’s purchase price each year for repairs and maintenance expenses.
WILL YOU RECEIVE MONEY AS A GIFT?
A down payment gift from a family member, friend, corporation, or charity is accepted by many financing programs. However, not knowing who will provide the funds and when can jeopardize a loan approval.
Make sure the Bank of Mom and Dad is ready, willing, and able to help you with your down payment before you start looking for a house. If a buyer makes a contract to buy a house with the expectation of getting gift money and the gift money never arrives, the buyer’s earnest money deposit may be forfeited.
If someone offers you money as a down payment gift, have an open and honest dialogue with them about how much they’re offering and when you’ll get it. Make a copy of the check or electronic transfer to show how and when the monies were transferred from the gift donor to you. Lenders will check this with bank statements and a signed donation letter.
Summary: First Time Home Buyer Tips
Buying your first home requires a flurry of big decisions, and the process can be both nerve-wracking and exciting. It’s easy to get caught up in the thrill of property seeking and make mistakes that could lead to buyer’s remorse later on.
If you’re a first-time purchaser or haven’t bought a house in a long time, knowledge is power. It’s critical to get advice from reliable sources so you know what to expect and what questions to ask, as well as where the dangers are.
If you have any questions about First Time Home Buyer Tips contact me today.