How can you avoid making mistakes when you buy your first home?
One of the biggest milestones in your family life is when you and your spouse buy a home for the first time. For some, this is done with the lens of welcoming a first child or adding a child. For others, it will be for work or extended family reasons. Whatever the reasons you are in the market for new home for the first time, those reasons are unique to your family.
The reasons families seek out a new home are unique, but many of the mistakes first time homebuyers make are, unfortunately, very similar. These mistakes are not about deciding between shiplap or cerulean blue paint for your wall. A home is one of your biggest financial decisions and will affect your financial life for years down the road. Don’t let that deter you or discourage you. Use these mistakes as a guide to make the experience better for your family and avoid these first-time home buyer errors.
"For you are to cross over the Jordan to go in to take possession of the land that the Lord your God is giving you. And when you possess it and live in it" Deuteronomy 11:31 ESV
Not agreeing on why you want to buy a home
This might seem confusing at first but consider the thought process here. If you have one spouse that wants to buy a house with the belief it can be sold in a few years for a profit and the other spouse wants the home to be your family’s “forever home.” Is that a recipe for conflict down the road? Perhaps, so spend some time calibrating your reasons as a couple at the beginning. It doesn’t mean that all of your reasons for wanting a home have to be the same. No one expects both husband and wife to be excited about the potential man cave or the craft room. What you do need is to ensure the goals and expectations between spouses are not in conflict.
House shopping before loan shopping
Sometimes, pre-approval for a loan doesn’t take long, but sometimes it does. Don’t put yourself in a situation where you find a great home, but then have to rush figuring out a loan. This often creates a situation where you feel pressure to “get it done” for fear of losing the home you’ve found and like. Take time up front to work on your mortgage and you’ll be better positioned when it comes time to make an offer on a property.
Not verifying history and correcting mistakes on your credit report
Your credit score, also known as your FICO score, may or may not be where you want it to be. Improving your score can be beneficial but takes time. The one exception to this is a mistake. The Federal Trade Commission found that 1 in 5 Americans have an error on their credit report.
Before you apply for a loan or pre-approval, check the credit report for both spouses to ensure it is accurate. If you do find a mistake, go through the steps necessary to correct the error. Each of the credit reporting companies has their own defined process to request a correction. In some cases, you will need to contact the business involved that originally made the report. Push through the paperwork to make sure the Annual Percentage Rate (APR) is not less favorable than you deserve due to faulty information.
Getting only one quote for a loan
If a friend told you they were planning to make a large purchase and asked you for advice, what would you say? Shop around for a good price would probably be part of your friendly counsel. The same folks who comparison shop for a good price on clothing often forget to do this for a prospective mortgage. A study found that over 75% of borrowers applied with only one lender.
There’s no set number you should apply to, but 3-4 is a good starting place. Remember, this is a loan you will pay interest on for years and a small difference in terms can make a big difference over the course of your time in the home. Differences can appear in the interest rate, closing costs, or other miscellaneous fees so be on the watch for opportunities to save.
Not learning about mortgage points and discount points
Mortgage discount points are often misunderstood. Points are an upfront fee that lowers the interest rate on your mortgage. The downside is this will increase the amount of cash you need at the time you close on your home. The upside is you will have a lower interest rate that could save you money over time. To get a benefit or break even from paying points, you’ll have to stay in the home for a while. How long? It depends on the terms. There are free calculators online to help you compare, but you will have to make educated guess on how long your family plans to be in the home.
Buying the Most House you Possibly Can
Lenders and realtors make more money on larger home purchases. They’re incentivized to steer you toward buying as much house as possible. Just because you’re pre-approved for a loan of a certain size or your credit allows a mortgage of a certain size does not mean you should “max out.” The ability to spend that much, does not mean you have to. Remember, your mortgage payment will likely be your biggest or one of your biggest monthly bills. This is a chance to influence that payment amount.
Spending your entire bank account
Don’t put yourself in a vulnerable position by depleting your savings. Putting the cash together for a down payment or other expenses can be challenging. A mistake some folks make is using all their savings for the home purchase and move. Leaving your family without an emergency fund for unexpected expenses or an interruption in employment can set you up for problems. As you save for a down payment, make sure there will be some available funds for your emergency fund even after you’ve moved into your new home.
Making the wrong down payment
The right or wrong down payment will depend on your situation, but too few prospective homeowners consider what their down payment should be and the effect on your family for years. If you have a down payment of less than 20% you will have an extra cost on your monthly payment of Private Mortgage Insurance (PMI). On the other end of things, some families believe a home purchase is not an option if a 20% down payment is out of reach. There’s a number of programs, some specifically for first time buyers, that help overcome that challenge. It’s also worth checking with specific banks and lenders on programs for first-time buyers. Remember, just because you have the option to make a lower down payment doesn’t necessarily mean you should. In any event, consider all the options available to you.
Forgetting about the cost of owning a home
It’s easy to remember costs like the mortgage payment for the home you’re considering. As a first-time homeowner, it can be hard to envision all the new costs that are part of home ownership. You might have some rolled into your payment like Private Mortgage Insurance, property taxes, or insurance. Other expenses will be separate. Some of these can include homeowner’s association due, utilities, household maintenance, lawn care, and more. As you consider a home, take this into account and be realistic about how this will change your spending.
Underestimating Repair, Renovation, or Upgrade Costs
Renovation shows are very popular. When you watch a home renovation compressed into 30 minute TV episode, the endeavor can seem easier than it is. It’s also a bit misleading about the cost because it’s not your money and that’s what TV does. If you buy a home that requires some work or simply because you want it, be levelheaded about what it will cost. This doesn’t mean you shouldn’t buy a fixer upper. It does mean you need to be honest and plan for a realistic cost for the work.
Neglecting Closing Costs and Moving Costs
Closing costs are in addition to your down payment. This category of costs covers a number of line items associated with closing. Some examples include title fees, attorney fees, lender fees, inspection fees, appraisal fees, title search fee, or taxes. This will vary by situation and where you are located, but usually falls between 2% to 5% of the home price.
First-time home shoppers are sometimes hesitant to negotiate terms. This is a big mistake a can make a huge difference in the final terms of the deal. The most obvious piece to be negotiated is the price, but this can extend to a number of factors. Negotiating factors like a home warranty, move in date, or even furniture you would like to be included could be points to propose. A good qualified realtor can help with this. Don’t be afraid to negotiate for better terms. Most sellers assume this will be the case and expect it.
Don’t let this list dishearten you. These mistakes are easily avoidable now that you know what to avoid. A first home can be stressful, but it’s also something to celebrate. Congratulations on your new home. May it be a joyous place where happy memories are made for years to come.
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