Buying your first home is exciting. It’s so exciting, in fact, that you can easily get wrapped up in the emotions. Before you jump in head first, learn the common mistakes some first-time homebuyers make. This way you can avoid these issues and enjoy your new status as a homeowner.
Forgetting About Other Costs
Buying a home is more than about paying the cost of the home. Let’s say you bid $150,000 on a home and the seller accepts it. You have many more expenses outside of that $150,000 to consider. For starters, there is:
- Homeowner’s insurance
- Property taxes
- Homeowner’s association fees
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When you figure out your budget, account for any potential expenses. Have an emergency fund for unexpected repairs. You should also account for rising taxes and insurance. First-time homebuyers may overlook the fact that home’s appreciate. This usually means higher taxes and insurance. Year-round maintenance and furnishing the home should also play a role.
Not Thinking About Other Debts
Your debt ratio plays an important role in your ability to secure a mortgage. With a high ratio, you may not be able to secure an approval. Two of the common debts that hold borrowers back from approval are student loans and auto loans. Student loans aren’t something you can help. If you took them out several years ago, you just have to work on paying them down. Doing what you can to minimize those payments may help, though.
Consider your options for debt consolidation or even student loan forgiveness. There are many ways the government helps you make your student loans more affordable. You have to ask for the help, though. Talking to your current loan servicer can help.
Car loans, on the other hand, you may be able to control. While you probably need a car, you don’t need a fancy one. If the car payment is too high, consider a cheaper car. One you can pay cash for or that will have a lower loan payment. This way you can lower your debt ratio and possibly afford more home. In some cases, it makes the difference between a loan approval and denial.
Making Large Purchases After Signing the Contract
Don’t make the mistake of thinking you can do what you want once the lender pulls your credit. If you only have a pre-approval, the lender will pull your credit at least two more times. The first is when you sign the contract. Unless you sign one within a few weeks after getting the preapproval, the lender needs to make sure nothing changed. Many lenders also pull credit right before the closing, again for the same reason.
Once you sign a contract, don’t charge your credit cards or open a new one. Wait until you close on the loan to buy furniture or make any other large purchases. This way you can preserve your credit score and not put your approval at risk.
Not Shopping for a Lender
Many first-time homebuyers use their current bank for their mortgage. This may work great for you. But, how do you know what other options are available? Shopping around with at least 3 lenders is ideal. This way you know what is available to you. Different lenders may have different interest rates, terms, and closing costs. Remember, this is one of the largest investments of your life. You want to pay as little as possible and have the best terms. Don’t take what your current bank provides at face value. Have something to compare it to so you know what is a good deal and what isn’t.
Shopping for a Home Without a Preapproval
This occurs all too often. Buyers are excited to see what is out there. They start looking at homes before they talk to a lender. This is bad for two reasons:
- You don’t know what you can afford. So how do you know which homes to look at?
- Sellers often don’t want to waste their time on buyers without a preapproval.
The preapproval process may only take one day. You provide the lender with personal identifying information, such as your address and social security number. You also provide your financial documents. Things like your paystubs, W-2s, and bank statements are all they need. Once they pull your credit and ask questions about your employment, they can determine what you can afford.
The preapproval letter can help you stay within your budget when you shop. What’s the point of looking at homes you can’t afford? You waste your time and that of the seller.
Skipping the Home Inspection is One of the Biggest Mistakes
We know buying a home is expensive. It seems like every time you turn around lenders are asking for money for something else. There are certain expenses you just shouldn’t skip, though. The inspection is one of them! While many loan programs make the inspection optional, we consider it more of a mandatory thing. It helps you know what is wrong with the home. Sure, the appraisal can give you a basic idea, but that’s only at the surface. The appraisal doesn’t get the nitty gritty details that the inspection may provide.
The inspection could stop you from buying a home that would otherwise drain you financially. What if the foundation is cracked or the roof needs replacing? You may not know these things. The inspector looks at hundreds of aspects of the home to make sure it is suitable for you. Once you get the report, you can decide if you still want to purchase the home. If you have an inspection contingency in your contract, you would have a way out without losing your earnest money.
Not Thinking of the Future
Again, getting caught up in the excitement of buying a home is so normal. When it affects your future homeownership, it could be a problem, though. For instance, let’s say you fall in love with a home that only has 2 bedrooms. You don’t think about how long you plan to stay in the home. You don’t think about whether you will start a family either. After a few years in the home, you have 2 kids. You may already start to outgrow the home. You may not have any choice but to move. If you thought about this beforehand, though, you may have skipped the 2-bedroom home and looked for a bigger one that could suit you for the future.
Using the Seller’s Agent
As a buyer, a real estate agent costs you nothing. It pays for you to find one you trust. This way the realtor can represent you in the sale. If you use the seller’s agent, they are still bound to act ethically for both parties, but that’s difficult. At some point, you may feel slighted by the decisions made. It pays to have two separate parties representing the buyer and the seller. The buyer’s agent still gets paid from the seller’s agent. If you don’t use an agent, the seller’s agent keeps 100% of the agreed upon commission. If you use a realtor, the seller’s realtor must split it with your realtor. Again, it is no cash out of your pocket. Yet, your interests are better protected.
Being a first-time homebuyer is scary and fun at the same time. Before you jump in, stop and think. Get your affairs in order so you get the best deal available to you. Your first few steps should be to find a realtor and a lender. This way you will know what you can afford and a realtor can help you find it. Plus, the realtor can represent your interests in the transaction. Of course, make sure you keep your financial affairs in order before and after you sign the contract. Lenders are watching how you conduct your financial life.
With the right help, being a first-time homebuyer can be a smooth process without any mistakes!