There is nothing more exciting than buying a home. To ensure your first home purchase doesn’t cause you a whole lot of hardship or put your financial future at risk, it’s essential that you avoid these mistakes.
Buying a home while you are not sure about your future plans – Homes are not liquid assets. If you decide the home is no longer right for you, it’s costly and time consuming to sell. If the sale happens within 3-years of purchase you might not have enough money to pay back your loan and cover closing costs and agents’ commissions.
Not getting pre-approved for a loan – Talk to a lender prior shopping for home, you need to know your budget before looking at home, you might get disappointed when you discover that your budget is lower than you expected. The lender will give you the pre-approval letter that will show the amount you are pre-approved for, which you can submit with your offer.
Not shopping around for a loan – Shopping for a mortgage is a gigantic pain, you have to make applications with every lender and submit many financial documents. When taking on a such large debt, even a subtle difference in interest rate will affect your monthly payment in a big way.
Not Checking you Credit Score – About one in 5 people have errors on their credit report and this might affect your credit score. Credit score influences what interest rate and type of mortgage you can get. If your credit score is low, try fixing your credit before buying a home.
Not having enough money for down payment – If your down payment is less than 20% of the purchase price, you will be required to pay private mortgage insurance (PMI). PMI varies .5% to 1% of the entire loan, this can be a huge sum to pay annually. Putting 20% down might also protect you when the market is down, you won’t owe more than your home is worth.
Not planning for closing costs – On top of the down payment, buyers have closing costs (expenses related to the purchase of the house). Closing Costs and Pre-paids are usually 2-3% of the total home price.
Not inspecting the home – Your offer should be contingent on passing the home inspection. Don’t assume because the house is new it is in a good condition. You might be able to negotiate with the seller to make some repairs or reduce the sale price.
Not looking at the total cost of home ownership – When you purchase a home, the mortgage payment is just one of many costs homeowners have. Consider other costs as property taxes, property insurance, HOA dues, utilities, home maintenance and repairs.
Working with the wrong realtor – A good realtor will help you navigate the home buying process and can save you thousands of dollars on the purchase. See also How to Find The Right Buyer’s Agent.
Making big financial changes before closing on a mortgage – Don’t make large purchases, borrow money or change your job during the transaction, these can prevent the deal from closing. Discuss any financial changes in advance with your lender.