Knowing What You Shouldn’t Do
Owning a home is one of the most effective wealth-building tools available to the everyday consumer.
It’s no wonder that first-time home buyers are out in force. One-in-three home sales today are to first timers, and many more are queuing up to be homeowners in 2017.
But when you’ve never done something before, it’s difficult to know what you shouldn’t do. Sometimes, new buyers make mistakes.
Fortunately, the mistakes, even if made, don’t mean disaster. But if you can avoid them, you should.
Following are five common mistakes for first-time buyers — and experienced ones — to skip when you buy a home.
1. Jumping The Gun
Don’t go shopping for property before getting pre-approved for your mortgage. Mortgage pre-approval offers so many advantages. It’s fast, and can save you headache down the road.
- Sellers and agents won’t take your offer seriously without a pre-approval letter
- Pre-approval helps you determine what you can afford
- Pre-approved mortgages close faster
- Pre-approval minimizes financing problems during escrow
Note that mortgage pre-qualification does not usually go far enough. Until you complete an application package and get pre-approval from a mortgage underwriter, you’re not fully-prepared to close on a home purchase. This could result in embarrassment, wasted time, and lost money.
2. Going Too Big
Mortgage lenders work with certain formulas and ratios to determine how much you can afford to borrow. However, just because you can borrow a maximum amount doesn’t mean you should. Lenders don’t know everything about you, and what they don’t know can hurt you. For instance:
- Expensive hobbies may leave you less money for bills
- A planned job or industry change could cause your income to decrease
- Starting a family, retiring or sending kids off to college may strain your budget
- Too much mortgage could reduce what you can save or contribute to charity
- An expensive commute can unbalance your checkbook
- Starting a new business could eat up your savings
Keep in mind also that housing expense is about more than the mortgage, taxes and insurance. You’ll have maintenance and repairs, and that runs between one and five percent of your home’s value each year, depending on your home’s condition and location.
If there’s any doubt, don’t push the envelope. When determining an affordable payment, consider what you’re spending on housing now, and decide how much more you can afford to pay.
3. Being An Eager Beaver
For some home buyers, love is blind. And deaf and dumb. No matter how much you want a property, foregoing inspections and ignoring other buyer protections is unwise. Here are a few to consider:
- Get a home inspection and an appraisal, even if your lender doesn’t require it
- Make sure the property’s septic system (if not on city sewer) has been pumped and inspected in the last five years
- Include a financing contingency in your contract which negates the contract if financing falls through.
- Make the purchase contingent on the sale of your current home, if applicable
- Only put up refundable earnest money
- Read your community’s Covenants, Conditions and Restrictions (CC&Rs) for deal-breaker rules
In addition, order the home’s Comprehensive Loss Underwriting Exchange (CLUE) Home Seller’s Disclosure Report. It lists insurance losses at the property address within the past five years and can alert you to potential problems with the home.
4. Letting Your Agent Call The Shots
Choose your real estate agent based on ability, reputation and experience — not because she’s your Mom’s friend or he’s married to your cousin.
Even if you have a good agent, though, don’t let him or her pick your mortgage lender. Agents care about closing quickly, which is usually important, but the costs involved may not be on their radar.
If you care about costs and mortgage rates, get some quotes from competing lenders, interview a couple of loan officers and choose your own financing.
5. Getting Cleaned Out
Finally, don’t spend every cent you have on your down payment and closing costs.
Homeowners should have emergency savings. If you experience an income interruption or unexpected expense, you need funds in the bank to cover at least two months of mortgage payments. Those who are self-employed, on commission or in troubled industries probably need a six-month cushion.
Buying a house can be exciting and fun, if you avoid the above-listed mistakes. But feel free to make them if you’d like more stress and less money in your life.