So, you want to buy a home? This isn’t a decision to take lightly, and certainly not one to rush into. Financial blunders can leave you with buyer’s remorse, struggling to pay for your new home, or can prevent you from buying a new home altogether. A little knowledge goes a long way, so we’ve highlighted 8 common financial mistakes first-time homebuyers should avoid.
Not Getting a Mortgage Pre-approval
Taking the top-spot for shattered dreams in the world of real estate is finding your dream home, only to discover you can’t actually afford it. This all-too-common problem can be easily avoided by ensuring you’re pre-approved for a mortgage. A lender will pre-approve your loan after looking over your credit report, income, tax history, and other financial information. They’ll then let you know the maximum loan you qualify for, allowing you to shop around within your budget, while at the same time convincing sellers that you’re a serious buyer.
Going with the First Lender You Speak to
Taking out a mortgage can seem an arduous task at first, but there’s no reason to rush it. It’s important to shop around to find the best offer that suits your circumstances. Buyers often stick with their own bank, or the first lender they speak to, even though they could probably find a much better offer elsewhere.
Getting the Down Payment Wrong
Many buyers are convinced they’ll need to put down a solid 20% down payment, and put off buying a home until they’ve saved up this princely sum. This can take years, and affect your quality of life along the way, and it’s totally unnecessary. While putting down 20% will save you from paying mortgage insurance, you’re by no means obliged to pay so much, and can put down as little as 3.5%, or even 0% with certain types of mortgages.
On the other hand, if you can afford to, it’s probably better to avoid putting down too little on the down payment. A small down payment can lead to more expensive monthly repayments, reducing your monthly budget considerably. It’s all about finding the right balance.
Not Taking Care of Your Credit
You might be tempted to think that once your loan has been pre-approved by a lender, you’re in the clear. However, lenders will carry out further credit checks before they officially underwrite your loan. If you don’t take care of your credit during the interim, you might find yourself falling at the last hurdle, which can cost you your new home, plus any money you’ve already paid out.
Avoid this by maintaining the status quo; don’t take out or close lines of credit, or move large amounts of money around without the resources to explain where the cash has come from. Large, unexplained sums of money that appear in your account can look like disguised loans to the lender, who will be wary that your debt to income ratio has changed.
Getting a New Job
Following on from the previous point, try to avoid changing your job while buying a house. Lenders generally require 2-years proof of stable income and will pre-approve your loan based on this. Changing your job in the meantime can invalidate their previous offer. If you know you will have to switch jobs, tell your lender from the get-go.
Forgetting About Closing Fees
Buying a house is not like most other transactions. There are a number of costs you need to factor in besides mortgage payments and the down payment. Forgetting to add these up, and consequently budgeting for them can leave you struggling to keep up with payments after you’ve moved in. Take time to consider costs such as home inspection, agent and legal fees, tax, insurance, maintenance, utilities, moving costs, and many more.
Emptying Your Savings Account
Going all-in when purchasing a home is a big no-no, though it’s something many first-time homebuyers are prepared to do in order to get a foot on the ladder. However, it’s essential that you keep some cash aside, in case of unexpected costs such as emergency repairs, etc. If you don’t keep a comfortable cushion, you can find yourself struggling to keep up with payments, and possibly being forced to foreclose.
Not Knowing Your Options
There are many ways to buy a home, though many buyers don’t take the time to see what they are or if they qualify for them. Such schemes can ease the financial burden considerably. It’s worth checking out first-time buyer schemes, which typically differ from place to place, as well as the numerous loan types, many of which are aimed at those who might not qualify for a conventional loan; check out FHA, VA, and USDA loans for example.
For most of us, buying real estate is the largest transaction we’ll ever make, and perhaps the most complicated. As such, there are plenty of opportunities for the unprepared first-time homebuyer to make mistakes along the way. Taking the time to research the whole process thoroughly will really make a difference.