You’re excited because you’re going to finally own a home! It’s scary, too, because buying a home is one of the biggest financial decisions a person will make. Lots of people do it correctly — there are millions of homeowners out there. But there are things you need to know to ensure your dream comes true. There are some mistakes that might make it either more difficult for you to buy, or the lender may deny the loan altogether. If you pay attention, you’ll easily avoid these 8 mistakes and end up as a proud homeowner without being in over your head.
Here are other people’s mistakes. Don’t make these and you’ll be fine!
1. Failing to manage and increase their credit score
Unless you’ve inherited money or have a huge amount of money in the bank, you’ll need a loan to buy a home. Anyone lending you money will look at your debt-to-income (DTI) ratio, which is a huge deciding factor that determines how big of loan you can take out, and sometimes the interest rate as well. The more debt the borrower has, the less of a loan they will be able to get.
Most lenders look at your financial information and your DTI ratio again before closing to make sure that nothing has changed. So, don’t buy anything big (like furniture or appliances) on credit until the mortgage loan
has gone through or you may be in for a nasty surprise.
2. Not taking the time to be pre-approved or even prequalified before house hunting
You might assume you can afford a home in a certain range and then start looking without getting approved for a loan first. These days, most real estate agents won’t show potential homes if you don’t have a prequalification letter in hand. And some won’t do anything without the pre-approval. What’s the difference? Prequalification (which can be done over the phone or on the Internet) only gives you a general idea based on your finances, of what you should be able to afford. Pre-approval gives an exact amount for which you are approved. Pre-approval is a much longer process of knee-deep paperwork, and provides a conditional commitment to lend money — still conditional because stuff changes and stuff happens. It’s a good idea, though.
3. Overestimating what they can handle financially
As a first-time homebuyer, you might make the mistake of assuming that just because you can afford the house that means that you can afford to live there. That’s not always the case. There are many extra costs associated with homeownership that often get overlooked especially by people that have been renting their whole lives. Don’t forget to add property taxes, insurance, and utilities, repairs, gardening, etc., to your budget.
4. Choosing the home and ignoring the neighborhood
Even if you’ve done a good job of estimating your budget, you might find your dream home is still outside your reach in the neighborhood with the good schools or nice amenities. So you compromise. Don’t overlook your quality of life. Some things are more important than a big house.
5. Buying a “fixer-upper” when they don’t have the money or time to fix it up
Fixer-uppers might look like a great opportunity to save money. Make sure you have the money or the KNOW-HOW to do it yourself! Without money, time and knowledge, your “really good deal” will become a really big headache, and a huge disappointment. If you are handy with tools, then go for it, but make sure you have the money for all the materials you’ll need.
6. Using the Internet alone
This is a big mistake. The Internet is certainly an invaluable tool for homebuyers. Searching through homes, researching neighborhoods, getting your credit score, and finding out what lenders are prepared to lend has never been easier. However, it’s definitely not as good as getting a reputable team of local professionals who can physically meet with you and who know the facts about the neighborhoods, the lenders, and maybe even a soon-to-be-listed home that fits you perfectly. If something goes wrong, you want to meet a realtor or lender face to face to resolve the problem, as it will be much more effective.
7. Spending all their money on the down payment
Putting a 20% down payment on a home is a great idea if you want to avoid paying mortgage insurance. But, many people save and scrape every last dollar for years in order to meet that 20% down payment. You may be tempted to borrow from family members. Not a good idea, as you shouldn’t wait until you have 20% down to buy a home. It is a good investment at 5% down or more. Have a reserve amount of money for the essentials (see #3), including the fun stuff like new furniture and a veggie garden.
8. Skipping the home inspection
Skipping the home inspection might seem like a way to save money for some people. The excitement of a new home makes some people feel like there’s nothing that would possibly change their minds about wanting to buy it. But, would you think of buying a used car without having your favorite mechanic look it over? Same thing, but bigger problems for a house! You might face costly complications such as mold, termites, a leaking roof, electrical issues or foundation problems. Don’t skip this step!
Owning a home is still the American dream. By avoiding these mistakes and being prepared, you can live the dream.
Roll up your sleeves. Start at the top.
Since having a good score is so important, you’d better make sure it’s right! You can obtain a free copy (you’re entitled to a free copy every 12 months by federal law) of your credit report from AnnualCreditReport.com. The Consumer Financial Protection Bureau will help you correct errors.
The Mortgage Fee Coach can help you to achieve the lowest mortgage rates and fees possible. We have saved our past clients an average of $10,000.
Contact us (949) 484-6332 OR email Dan@MortgageFeeCoach.com if you have questions. The first 15 minutes are FREE!