Buying a home is not the same as any other purchase. When you are going to buy a house for the first time, you need to understand a few important things in order to make the right decisions. These decisions will affect your life, probably for many years to come, so you should learn about the first-time homebuyer mistakes that should be avoided to ensure your future well-being.
We have prepared for you a selection of the most common mistakes, understanding that you can turn a home mortgage loan into one of the successful steps in your life. Then you will learn what the first time homebuyer should not do, so that later doesn’t have to regret it.
Insufficiently responsible attitude to your credit
The condition of your credit determines how lenders treat you. This applies not only to the mortgage, but in general your ability to get financing for different purposes in different life situations.
Considering your application for a loan, especially as large as a mortgage loan, the lenders will request your credit report from the credit bureaus and then scrutinize it carefully. If you have a good or excellent credit and a long enough credit history without defaults and missed payments, then you will most likely get a preliminary approval of the mortgage.
Often first-time homebuyer mistakes this way, when having received pre-approval. Many cease to take their credit rating responsibly and begin to spend more, increasing the balance on their credit cards or getting new loans, even small ones. Thus, the ratio of credit to debt deteriorates, which immediately affects the credit score.
One of the most common first-time homebuyer mistakes teaches us that borrower should not confuses prior approval of a mortgage loan with the final closure of a home purchase transaction. Before closing the deal with the seller, lenders will double-check your credit again to make sure that your financial condition is stable.
Don’t let the good news turn your head go. Try to make sure that your credit score does not decrease until the very end of the process of buying a house. If possible, improve your credit rating by reducing your total debt.
Do not open new accounts so that your total debt does not increase, but also do not close old ones so that your credit history is not interrupted. Check your credit a few months before you decide to apply for a mortgage. Make your payments on time.
Many experts recommend planning a home purchase for at least a year. During this period, you will have time to noticeably improve your credit, as well as correct any errors or controversial points in your credit report. In addition, you will have the opportunity to accumulate some savings to make a down payment for a mortgage, which will increase your chances of approving a home loan.
Choosing a home before filing an application and getting pre-approval
Until you have received pre-approval from lenders, you cannot know how much money you can count on to buy a house. Why does this relate to first-time homebuyer mistakes? The fact is that when you choose a house for the first time, you may be influenced by a strong impression of your dream home, which can completely capture you.
This is fraught with the fact that you may want to try in any way to purchase a house that you cannot afford. By increasing and stretching your budget for buying a home, you can put yourself in difficult financial conditions that can turn into an unbearable burden for your monthly budget. In such circumstances, you risk being left without a home.
To avoid this, do not fall into this emotional trap. The main guideline in this should be a feasible monthly payment, and not the maximum amount of mortgage available to you. Begin to choose a house only after you meet with the lender and get a preliminary approval of a mortgage loan for a certain amount. Sellers will always prefer to deal with the buyer who has the pre-approval of the lenders.
Waiting for the perfect home
Buying a home, of course, is not an everyday event, so it’s quite natural that you want your new home to meet all your requirements and expectations. For the amount of money available to you, you want to get everything of your list. However, such a strategy can most often be attributed to the first-time homebuyer mistakes, which may prevent the transaction from taking place.
You should not get hung up on the ideal house, because as practice shows, ideal homes are caught in the real estate market extremely rarely, and usually cost more. Yes, you may have to make some efforts to make your new home perfect for you, but this approach will significantly expand your choice.
It is better to pay more attention to the area in which your future home is located. You can repair the porch or build another room at any time, but it’s unlikely to move the house to another district or a city. First of all, choose the area in which you will then have to live for more than one year, and this factor may have a significant impact on the value of your home in the future.
Find out the infrastructure of the area, its common atmosphere and the attitude of its inhabitants towards each other. Do not forget also to check the crime rating and others that will be available. This will allow you to understand whether this area is right for you, and to bring the house in perfect shape, you can take out a loan or even include the cost of repairs in the amount of the mortgage.
Considering the possibility of taking a mortgage from only one lender
At this, one of the most significant first-time homebuyer mistakes, many are losing thousands and thousands of dollars by the time they pay off the mortgage in full. To a person who already has a credit history and credit score at a sufficient level, but for the first time he takes a mortgage, many lenders are likely to make prior approval.
The catch is that it can often be the first available creditor, and the first-time homebuyer mistakes, when not considering other options. Even if the first lender approves your mortgage, do not stop there. Find out more options, what conditions are ready to offer you other lenders, looking for the most favorable conditions.
On the other hand, you should not get involved in this process and try to get pre-approval from the largest possible number of lenders, you will lose a lot of time on this, and there is little sense in this. Find out the terms of the mortgage at least three different lenders, and then select the one that will be most suitable for you.
You will have 45 days to ensure that submitting an application for approval of a mortgage loan to different lenders does not hurt your credit. During this period, you should choose a lender and choose the house you would like to purchase.
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- Spend all your savings on mortgage processing
Many make such first-time homebuyer mistakes, which leave them without emergency funds, in pursuit of savings on mortgage insurance. Very often first-time homebuyer mistakes when go all out to collect 20% of the home value for a down payment, which makes it possible not to pay a large enough insurance included in the total amount of the mortgage loan.
This way is undoubtedly more profitable and significantly reduces the monthly payment on the loan, but it is not a prerequisite. Leaving yourself completely without savings and with debts, you risk being left without anything in the event of an emergency. It is worth keeping a reserve of savings for at least a few months of life, in case anything happens.
In addition, if you delay the term of a home purchase in order to accumulate 20% of its value, you can lose a lot of time and money that could work for you, for example, in the pension program. Every 5,000 dollars taken out of the pension program 401 (k) in 30 years will result in the loss of tens of thousands of dollars that you could earn thanks to a compound percentage.
If your income does not allow you to quickly save 20% on the initial payment, then find out what government programs are for the first-time homebuyer. In order not to miss the time, it will be enough for you to save 3% on the mortgage insurance payment.
- Ignoring public housing programs
The US government offers three housing loans for various categories of citizens. The Federal Housing Administration (FHA loans) offers loans to borrowers with an insufficiently high credit score with an initial contribution of only 3.5%, provided that the borrower’s credit score is at least 580 points.
USDA offers loans that target middle and low income borrowers. These loans enable such people to buy houses in rural areas that meet the requirements of the organization. If you have a low income, it is likely that you will not need to make a down payment at all.
There is also a crediting program of the United States Department of Veterans Affairs (VA loans) for veterans and active-duty military service members. These loans as well as the USDA loans do not require down payment.
- Immediately agree with the proposed price of housing without negotiating a discount
There are commission discounts for the first-time home buyers, who most often do not try to get it. These discounts are not available in all US states, but in most states where they are accessible, they can help save thousands of dollars.
- Do not calculate the hidden costs of homeownership
One of the very common first-time homebuyer mistakes is overlooking all expenses that are expected of a new homeowner. When applying for a mortgage, you must take into account that in addition to the loan payment itself and the interest rate you will also have other one-time and fixed costs.
You will need to pay mortgage insurance if you make less than 20% of the initial payment, property tax, accident insurance, homeowners insurance, maintenance, utilities and repairs costs.
As a new homeowner, you will have to rely on the fact that you will have to pay several thousand dollars a year for the maintenance of your home. Therefore, you should not leave yourself completely without savings and use the maximum available amount of a mortgage loan only to buy a house. Try to keep 2-3% of its value for the maintenance of your house per year.
Do not include gift money when applying for a mortgage
If your family members, parents or any organizations are ready to provide you with financial assistance in purchasing a home, in most cases you will be able to use this money to make a down payment.
Many admit first-time homebuyer mistakes if they don’t add gift money in their income when they try to get pre-approval of a mortgage loan. If you know that some are ready to help, then discuss with them the details of the gift, when and how much they can help you and take a signed gift letter as a document confirming it.
- Make decisions based on emotions
Buying a home is an outstanding purchase. For many, it is a significant event that causes a lot of positive emotions. However, one should not forget that home is expensive property, for which appropriate care and constant investment in it is needed, so that it not only preserves its value, but also increases it.
Do not be emotionally attached to the house, guided solely by considerations of comfort. Moreover, most likely in the next 20-30 years it will not fully belong to you until you have fully repaid your mortgage.
It may be worthwhile later to sell your home or refinance your mortgage to reduce the monthly payment or home loan period. Just treat your new home as one of your financial instruments.
As you can see, the first-time homebuyer mistakes can significantly affect one’s welfare, but when you know about them, they can be avoided quite easily. The main thing is to keep your mind cold and do not give in to emotions, making important decisions.
Track your expenses, make your monthly budget and stick to it, as well as find ways to spend less, and positive financial results will not take long to wait. Read our financial blog and know how to manage your finances effectively.