Don’t fall for these common pitfalls when preparing to buy your home.
Buying a home can be intimidating, especially for first time home buyers, but a little knowledge and preparation can help you be successful. Start by understanding these common mistakes so that you are able to avoid making them yourself.
Before you start looking for properties to buy, take a look at your budget. Determine what you can afford on a monthly basis and see homes in your price range that fit your finances, so you don’t get frustrated.
Going to houses open to the public and falling in love with a place you can’t afford is not a good start to your home purchase. Not prioritizing what you want on your wish list (stainless steel appliances) over necessities (enough bedrooms) or insisting on searching only one neighborhood can lead to overspending. Stay focused and be flexible.
Generally, your monthly mortgage payments shouldn’t be more than 28 percent of your gross monthly income. If you have a lot of other accumulated debt, that percentage should be even lower. Make estimates based on your current income, not your expected earnings in a few years.
To help you determine if you qualify for a mortgage and calculate the amount of the rate, your lender evaluates your credit report and your debt-to-income ratio, which is the ratio of the amount of money you owe to the amount you receive.
As a first-time home buyer, you may need a little extra time to gather the documents you’ll need – you need to show the lender your tax returns, pay stubs, and financial statements, so make sure you have those documents prepared. Check your credit report to make sure there is nothing unexpected about your financial profile.
To ease the qualification process and help you get the best rates for a loan, work to improve your credit score and debt-to-income ratio before trying to apply for a loan.
When lenders prequalify or pre-approve you for a mortgage, they provide you with an estimate of how much they might be able to loan you. Prequalification can give you an idea of what your price range should be. It is important to note that being prequalified does not guarantee a loan, but it does help through the process.
Pre-approval is a conditional loan approval in which an approver assesses your credit and ability to pay, based on your information in required credit and income documents. Pre-approval generally depends on your not changing the information you initially provided about your financial situation, and on choosing a property that meets the guidelines set by the lender. Make sure the pre-approval is issued by a mortgage approver who has evaluated your ability to repay the loan.
A home inspection is an added expense that all first-time home buyers may not know about, and some may feel that it is not necessary to do so. After all, you have seen the property, and nothing seems wrong. However, professional inspectors often notice things that most of us don’t see. Therefore, this part of the process is especially important if you are buying an existing home (rather than building a new one, which could include a builder’s warranty). If the home needs major repairs that you can’t see with the naked eye, the inspection will help you negotiate the repairs with the current homeowner or adjust the price accordingly.
Buying a home involves closing costs in addition to the down payment and which can be considerable. These costs, which include attorney’s fees (if applicable) and title insurance, are paid when you sign your final home loan documents. Typically, your total closing costs are 3-5 percent of the home’s purchase price, so you should add this cost to your budget.
This may come as a surprise to first time home buyers: once you have the keys in your hands, you will have other additional expenses, in addition to the monthly mortgage payment, such as property taxes, homeowner’s insurance and regular maintenance. Similarly, depending on where you live, you may have to pay fees to the homeowner’s association or a cooperative board.
If you establish an escrow account with your lender, your monthly payments will include property taxes and insurance, as well as your mortgage principal and interest. You may even notice that your property taxes go up a bit after closing based on the price of your home, which can make your monthly payment a bit higher.
When determining how much you can afford to spend on your home each month, include these expenses in your budget.
