Buying your first home is an exciting time. But it can also be overwhelming. At a time when it is a sellers’ market, there is no room for error. If you are ready to take the plunge into homeownership, here are ten common mistakes you need to avoid that could kill the deal or your finances.
Mistake #1 – Not Being Pre-Approved for a Mortgage
Before you look at your first house, you should already be pre-approved for a mortgage. This gives you a realistic picture of how much you can spend on a home. If you only qualify for a $269K mortgage, you certainly do not want to waste your own or a seller’s time looking at a property that is listed for more than twice that amount. Another important point to consider is that a sellers’ market is extremely competitive. If you fall in love with a home and are not already pre-approved for a mortgage, you could lose your opportunity to purchase it to a buyer who came prepared with a pre-approval.
Mistake #2 – Not Shopping Around for a Mortgage
A big mistake that many make buying a home is going to one lender to get a mortgage. They may not be getting the best loan rates. Obtaining a lower interest could save you thousands of dollars over the life of your loan. A rule of thumb is to contact at least three mortgage lenders. However, you need to keep in mind that when a lender runs a hard inquiry on your credit, your credit score is likely to get a slight ding. The good news is that most credit scoring calculations do not harshly penalize borrowers who are rate shopping for a mortgage.
Mistake #3 – Not Making Sure Your Credit is in Order
You need to make sure that your credit is in order before applying for a mortgage. If you do not, you could be in for an unpleasant surprise if you are denied a mortgage or told you only qualify for a high-interest rate. The better your credit is, the better your mortgage interest rate will be. You are entitled to a free credit report from each of the three major reporting agencies every year. Request your reports and go over them to make sure that there are no errors that could be costly.
Mistake #4 – Being Careless with Your Credit Before Closing
Once you have received your mortgage pre-approval, do not make the mistake of doing anything to jeopardize your credit score or report. Do not change anything in your credit profile other than paying down your existing balances so that they are paid off or below 30 percent of your available credit limit. Do not make any major purchases.
- Do not open new lines of credit, including car loans or new credit cards.
- Do not close any existing accounts.
- Continue to pay all your bills on time and in full each month.
Your mortgage lender will run your credit report before your closing to put through your final loan approval.
Mistake #5 – Buying More House than Your Budget Can Handle
Do not overextend yourself by buying more house than you can afford. If you overextend your finances, you could be at a higher risk of losing your home through foreclosure. It will also make it more difficult to stretch your budget to cover other expenses and bills. Even though you may qualify for a more expensive mortgage, it is better to consider whether you can afford the monthly payment and only borrow what you can realistically afford to pay back.
Mistake #6 – Rushing into Buying a Home
Buying a home could be one of the biggest investments you will make during your lifetime. Rushing through the mortgage process and pushing for a shorter closing period could work to your detriment. It may not give you enough time to finish saving your down payment and closing costs. Consequently, it may also interfere with you cleaning up your credit report of negative information that will prevent you from securing a better interest rate.
Mistake #7 – Spending All Your Savings on a Down Payment
Many first-time homebuyers make the mistake of draining their savings to scrape up enough cash to put at least 20% down on their home purchase. This is because they do not want to pay for private mortgage insurance. Yes, avoiding PMI can save you a lot of money on your mortgage payment. However, you should not run your savings into the ground by depleting your retirement savings or emergency fund. Paying PMI may make better sense than taking the risk of not having an emergency fund to fall back on when needed.
Mistake #8– Not Researching Your Down Payment Options
Do not assume that you must put down at least 20% on your home purchase. According to the National Association of Realtors, first-time home buyers typically make down payments of 6% on their home purchases. Check with your realtor to see what your down payment should be, especially if your home purchase involves an HOA, co-op, or condo association.
Mistake #9 – Not Considering Government-Insured Loan Programs
A first-time buyer may be shell-shocked with rising home prices in a sellers’ market because sales inventories are lower than in a buyers’ market. If your credit is so-so or you do not have a lot of money saved for a down payment, you might not qualify for a conventional mortgage. You do not need to throw in the towel on buying a home.
Instead, consider getting a mortgage through a government-insured loan program.
You may be eligible for a(n):
- Federal Housing Administration (FHA loan)
- U.S. Department of Veterans Affairs (VA loans)
- U.S. Department of Agriculture (USDA loans)
These loans have lower credit score and down payment requirements that make buying a home more affordable.
Mistake #10 – Not Understanding All Costs Involved with Home Ownership
Do not make the mistake of not understanding all the costs involved with owning a home. If you only rented in the past, you may be in for a rude awakening when you have to pay:
- Homeowners’ insurance
- PMI if you make less than a 20% down payment
- Property taxes
- All utilities
Do not forget that you will also be responsible for any repairs or maintenance that needs to be done on your home. According to Bankrate, the average homeowner pays about $2,000 each year on maintenance. Your realtor can help you estimate what your costs of homeownership will be so that you are not caught by surprise once the bills start rolling in after buying a home. To help cut your financial stress, make sure to put away at least 1-3% of your home’s purchase price each year as a savings cushion to pay for repairs and maintenance.
First-time homebuyers in the DeLand area can rely on the experience of Palmetto Realty’s team of professionals. Give us a call today!