How to Avoid First-Time Homebuyer Mistakes
Tired of renting and ready to take the plunge into homeownership? Congratulations! Purchasing a home is a huge milestone in most peoples’ lives, so before you run out of the door to look at houses that strike your fancy, there are some issues to consider to help you avoid making a costly mistake and make the experience as enjoyable as it should be:
1. Find out how much you can afford
Many first-time homebuyers fall in love with a home before they know how much they can afford. It’s in your best interest to start with a mortgage lender and get a fully underwritten pre-approval. Being preapproved sends the message that you’re a serious buyer whose credit and finances are in place to successfully get a loan. There’s nothing worse than missing out on a home because you haven’t been pre-approved for a mortgage you can afford.
2. Comparison shop mortgage lenders
Mortgage interest rates vary from lender to lender, as do lender fees and loan terms. The more you shop around, the better basis for comparison you’ll have to ensure you’re getting a good deal and the lowest rates possible. You should also weigh customer service and lender responsiveness, as they greatly affect how smooth the mortgage approval process runs. All mortgage applications made within a 45-day window will count as just one credit inquiry.
3. Check your credit report and correct errors
A mortgage lender will pull your credit report prior to deciding whether to approve your loan and at what interest rate. Any new loans or credit card accounts on your credit report can jeopardize the closing and final loan approval. Buyers, especially first-timers, often learn this lesson the hard way. You may request a free credit report every year from each of the three main credit bureaus, ensuring you have not missed any errors.
4. Look into first-time buyer programs
Potential new homebuyers tend to assume that they need to have 20% down payment to purchase a home. In actuality, there are plenty of lower down payment loan programs that offer down payment assistance and competitive mortgage rates for first-time homebuyers. Look into one of the three government-insured loan programs: FHA loans, VA loans and USDA loans.
VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. They’re for people who have served in the military. VA loans’ claim to fame is that they allow qualified homebuyers to put zero percent down and get 100% financing. Borrowers pay a funding fee in lieu of private mortgage insurance.
USDA loans can be used to buy homes in areas that are designated rural by the U.S. Department of Agriculture. Qualified borrowers can put zero percent down and get 100% financing. You pay a guarantee fee and an annual fee in lieu of private mortgage insurance.
FHA loans allow for down payments as small as 3.5%. What’s more, the Federal Housing Administration can be forgiving of imperfect credit. When you get an FHA loan, you pay mortgage insurance for the life of the mortgage, even after you have more than 20% equity.
5. Don’t blow all your savings
Many new homebuyers want to put a 20% (or more) down payment to avoid paying private mortgage insurance when getting a conventional mortgage. But putting all of your savings into the down payment can be risky. A buyer needs to budget for closing costs, moving expenses, and potential repairs. It’s also wise to have three to six months of living expenses in your savings account. It’s better to pay private mortgage insurance for a period of time rather than having nothing in your emergency and/or retirement funds.
6. Anticipate the costs of homeownership
As a new homeowner, you will pay for property taxes, homeowners’ insurance, repairs, maintenance, utilities and possibly homeowner association fees. Find out how much a neighborhood’s property taxes and homeowners’ insurance typically run, and question the seller as to what their average utility bills are. Focus on what monthly expenses you can afford rather than fixating on what your monthly principal plus interest will be. Make a current budget on what you spend now to see how much of you “true net income” is left for a house note you would really be comfortable with. Just because you can qualify for a certain loan threshold does not been you can afford to pay it coupled with your other expenses.
7. A great realtor is not to be underestimated
A realtor can provide local information on utilities, zoning, schools, and more. They also have objective information about each property and its neighborhood. A realtor can use that data to help you determine if the property has what you need. A licensed, professional, experienced buyer’s agent who has negotiated a home purchase dozens of times in their career is in a much better position to guide a first-time buyer on the purchase contract, offers and counteroffers. Also, the home seller pays the realtor’s commission, so there is no out of pocket costs to you.