Mistakes are common for first time home buyers. Numerous inexperienced homebuyers annually enter the market, only to repeat the mistakes of their elders and social circles. However, today’s novice buyers may break the trend. The following are common mistakes and the best way to avoid them.
A Failure to Calculate Housing Costs
It’s not wise to start looking for a home before figuring out how much you can afford. You may waste time seeing properties that are out of your price range right now or that are too expensive for your current budget. Many first-time buyers prioritize a manageable monthly payment when looking for a home to buy.
Using a mortgage affordability calculator, the right way to stop making that mistake is to get an idea of the reasonable, and extreme price ranges.
Simply Requesting a Single-Cost Quotation
It’s in your best interest to shop around when looking for a home to purchase, just as you would for a vehicle or any other major purchase. When shopping for a mortgage, it’s important to compare interest rates and other expenses, such as points and closing charges. However, over half of borrowers don’t shop around for a loan.
The right way to stop making that mistake is: Fill out mortgage applications at many different banks. When borrowers shop around among five lenders, they may save over $430 in interest payments for a year. Mortgage applications submitted within a 45-day timeframe will be considered.
Neglecting to Examine and Fix Problems on Credit Reports
Lenders will look carefully at your credit history when considering whether or not to grant you a mortgage loan and at what interest rate. An incorrect credit report might lead to a higher interest rate being offered to you. This is why it’s essential to check your credit report for mistakes.
Avoid making this mistake by taking advantage of your right to one free credit report from each principal credit agency every year. When you notice a mistake, you can have it revised or removed.
Placing an Insufficient Down Payment
A twenty percent down payment is not required to purchase a property for lending schemes that allow as little as a 3.5% down payment. That’s an intelligent move sometimes, but it leaves some homebuyers with second thoughts.
NerdWallet commissioned a study of 2,000 Americans under age 35 and found that 1 in 9 homeowners agreed with the statement “I should have waited until I had a higher down payment.” Young adults who bought their first homes in the 2000s often expressed this regret.
The right way to stop making that mistake: Determining how much money to put away requires some discretion. You may receive a smaller mortgage and lower monthly payments with a larger down payment.
Saving more money might be beneficial, but it could be counterproductive if house prices and mortgage rates continue to rise, making it harder to purchase the home of your dreams and preventing you from gaining equity as home prices rise. The goal is to ensure that your down payment secures a monthly payment you can afford.
NerdWallet commissioned another survey asking millennial homebuyers about their down payment savings strategies. Among millennials who made a house purchase during the last five years, saving for a down payment took an average of 3.75 years. To summarize, you are not alone if it takes three to four years to save money.
Not Searching for Programs for First Time Homebuyers.
If you’re buying a house for the first time, the down payment and closing expenses might consume your savings. But don’t put off buying a house because you think you need a hefty down payment. First-time homebuyers may find various low-down-payment lending options, including state-sponsored initiatives that provide down payment aid and affordable mortgage rates.
The right way to stop making that mistake: If you’re a first-time homebuyer, it’s a good idea to investigate the various programs available in your state and discuss them with a mortgage provider. A zero-down-payment loan from the United States Department of Agriculture or the Veterans Affairs Department may be available. The minimum down payment for an FHA loan is 3.5%, but a 3% down payment is required for specific conventional lending programs.
A Lack of Clarity on the Use of Discount Points
Discount points on a mortgage are an up-front cost that may lower your monthly payments. You may save much money throughout a mortgage by purchasing discount points and lowering your interest rate.
The right way to stop making that mistake: Don’t purchase discount points if putting down a small amount is a goal. With sufficient funds, the value of purchasing points is contingent upon the buyer’s intention to remain in the property for longer than the “break-even time.” In that amount of time, the savings from the reduced interest rate will have more than offset the initial expense.
Spending All of Your Savings
Buying a previously owned house guarantees you will have to pay for an unanticipated repair sometime soon after moving in. After a natural disaster, you may have to repair an old water heater or pay a higher deductible on your homeowner’s insurance.
Do not make this mistake by not saving enough money for a down payment, closing charges, relocation expenses, and unexpected repairs. Closing cost estimates may be obtained from your lender, and you can receive moving cost estimates by calling local businesses.
Making a Credit Application Before a Purchase is Finalized
Your mortgage application is finally submitted in one day. The financing is closed (or finalized), and you are given the keys to the home a few weeks later. Meanwhile, avoiding making any more inquiries into your credit is essential. It is not advisable to open a new line of credit, purchase items like furniture or appliances on credit, or take out a vehicle loan before closing your home.
Your debt-to-income ratio (how much of your income goes toward your monthly debt payments) and credit score will participate in the mortgage decision the lender makes. Making a credit application might temporarily lower your score. Your debt-to-income ratio will rise if you take out a new loan or add to your current monthly debt obligations. As long as the mortgage lender is concerned, both are bad.
Lenders often do final credit checks within a week following closing. Your mortgage interest rate and fees could increase if your credit score has dropped or if your debt-to-income ratio has increased. If this happens, your closing date may be pushed back, and your mortgage may even be canceled.
The right way to stop making that mistake: Do not buy a new couch, a new refrigerator, or any other large-ticket item on your credit card until after closing. You may plan and have everything selected, but you shouldn’t put any purchases on credit until you have the keys in your hand.
Conclusion
More and more millennials are at the age when they are starting to think about purchasing their first houses, and this article has explored the common pitfalls that first-time buyers face and how to prevent them. They have been able to get mortgages despite dire forecasts that they would not be able to because of their school loan debt or their penchant for expensive foods like avocado toast.
One of the most significant challenges of becoming a homeowner is saving up a sizable quantity of money for a down payment.