My wife and I purchased our first home five months after we got married. We had lived in a great rental townhouse but decided it was time to take the plunge. The market was very different; we drove by the home we were considering for several weeks, unable to make a decision. However, it was the lowest priced home in a great school district, so that was in our favor. Even with that advantage, we made some common first-time home buyer mistakes.
Looking at houses before you talk to a lender
I honestly can’t remember why we decided to buy a home. We didn’t have kids nor were they on the horizon. We had two cats that seemed perfectly happy in the townhome. But as I recall, we decided one day to look at available houses and then started imagining ourselves in one. After finding one we liked, we contacted a local lender to find out whether we could afford it or not.
Don’t be us. When you decide to start shopping, even if it’s just a spur-of-the-moment stop by an open house, contact your bank or a mortgage broker to get preapproved for a loan. Not only will you learn how much a bank will lend you, you will also be able to discuss interest rates and learn more about points on the loan.
Note: Before talking to a mortgage lender, check your credit report and make sure there aren’t any errors or erroneous accounts under your name.
Believing what the lender tells you
Preapproval is key for understanding how much house you can afford. Real estate agents will also tell you that your bid for a house will be strengthened by having a preapproval letter. However, don’t believe everything you hear from the banker or mortgage broker. They are notorious for inflating the amount of house you can afford. Every preapproval we’ve received has been at least $100,000 more than I would have felt comfortable borrowing.
Ignoring two percentages
While some people think this is out of date, many lenders still rely on two percentages to determine your ability to repay a loan. They total your mortgage payment, insurance, and taxes to ensure that this amount will be no more than 28% of your monthly gross income. On top of that, they will look at any other loans (auto loans, student loans, etc.) and add them to the mortgage, insurance, and taxes mentioned above to make sure that amount isn’t more than 36% of your gross monthly income.
Recently lenders have loosened the requirements, especially in areas where home costs are exorbitant. However, even if they will lend you more money, these percentages are a good way for a first-time home buyer to weigh whether they will be able to comfortably repay their loans.
Not considering what comes with purchasing a home
When you talk to the mortgage broker or banker, ask for a list of fees associated with the loan. You may be shocked at the amount of taxes and fees you will pay as part of the closing. Then there are packing and moving costs for all your stuff. Plus, most utilities will charge you a connection fee or deposit for gas, electric, and water.
Not understanding what comes with owning a home
Until recently, we’ve been lucky with homes. We’ve had to do normal upkeep, including a lot of painting, a roof replacement, and new HVAC systems at a couple of homes. But only a year ago were we forced to call our insurance company after a drain leaked in the downstairs bathtub.
However, these big-ticket items are just the tip of the barrel. When you own a home, you’re also responsible for yard maintenance, carpet cleaning (or installation), appliance repair (or replacement), etc. Plus, seemingly no one is happy buying a home and moving all their old furniture into that home. Americans are notorious for moving on up, often up to a bigger home. That means a new TV for the downstairs man cave or some furniture for the deck in back.
Falling in love with…
A house in a bad neighborhood. An overly renovated house. The most expensive house in a neighborhood. A beautiful home in a bad school district may make sense now, but will you want your kids attending the local school? An overly renovated house or the most expensive home give you less room to make improvements before you are priced out of the neighborhood. There’s a reason people say to buy the least expensive house in a good neighborhood. You have a lot more room to make improvements before you catch up with the nicer homes just down the street.
Missing out on buyer opportunities
First time buyers may be eligible for incentives from local, state, or national governments. You should research this on your own but also ask your mortgage lender for programs you qualify for. This may include FHA or VA loans.
Talking with only one lender
I researched what to ask a mortgage broker before we purchased our second home. I felt like I’d been flying blind with the first one. And one thing that has saved me thousands over the years is to play these guys against each other. Get the best deal from one person, then call up someone else (or go back to a previous contact) and tell them they have to beat this deal to get your business. I’ve had loans lowered by half a percent, and closing costs reduced by hundreds of dollars compared to the original estimate. Call at least three lenders.
Overextending
When I was talking to real estate agents recently about my home, they noted that today’s first-time buyer wants a finished and updated home. Many don’t want to put in the sweat equity that past generations didn’t mind. This is fine if you can afford it, but remember this is a first house. While you may think it’s your forever home, the average length of home ownership is just over 11 years. The longest we’ve owned a home is 8 years (and counting; it’s our current home).
Overextending can mean purchasing more home than you can afford. But it could also mean emptying your savings account or not thinking about other upcoming expenses that will coincide with your purchase. It’s important to keep a cash cushion, as much as you can, especially as you get used to the cost of living in your new home. Additionally, you should consider other expenses that could hit in the months soon after you close. Do you have a wedding to attend? Perhaps the holidays are coming up. Don’t ignore your current life needs just to push money towards a new home.
Opening a new credit card
You’ve found the house, you have a great deal on the mortgage, it’s just a matter of the loan officer receiving final approval for the close in a couple of weeks. You’re already mentally decorating the new spaces. While you’re online looking at rug options, you notice a new credit card offer that’s just too good to pass up, so you apply and are accepted. Unfortunately, this can jeopardize your chances of purchasing the house. Your mortgage approval was based on the information you provided. Now your credit profile – including your credit score – has changed. It’s essential that you don’t buy a car or open a new line of credit until after closing.
We’ve learned a lot since our first home purchase. Keeping the percentages in mind and playing mortgage lenders against each other have served us well. Here’s hoping that you avoid some of the mistakes we made while finding the house of your dreams.
Photo by Kindelmedia