For most Americans, it's pretty safe to say that a house will be the biggest purchase you'll make in your lifetime -- and a mortgage will be the biggest debt you'll ever carry. So you don't want to mess it up.
The idea of buying a home can be intimidating if you aren't familiar the housing market or if you don't know a thing about what a mortgage entails. But with a little guidance, the process can be a lot easier.
Don't let the unfamiliarity scare you. With the right information, you can get an affordable home that's right for you, your family and your finances.
So with that in mind, here are some mistakes to avoid when it comes time to buy a house.
1. Failing to review your credit score & credit reports first
Before you even consider buying a home, it's important to review your credit and make sure everything is in order.
Before you start the home buying process, you'll want to make sure your credit score is in good shape. Check your credit card or loan statement, talk to a non-profit counselor, use an online credit score service, or buy a score directly from credit reporting companies. If you and a partner or spouse want to buy a home, you may want to try to qualify for mortgage underwriting on just the income of the person who has a better score; most lenders will base your rate on the lower score if you're a couple.
If your credit isn't in the best shape, try getting it back on track as soon as possible.
2. Not pre-qualifying
It's very important to pre-qualify for a mortgage before you start the formal shopping process. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment will look like.
Getting pre-approved takes this a step further. It's good to get an idea of the loan you can get, and when your credit is in order and you're ready to start the process, getting pre-approved will give you a much more accurate estimate of how much the bank will actually lend you.
Also, keep in mind that the amount the bank will lend you may not be exactly aligned with what you can afford.
3. Getting just one mortgage quote
Most people only get one mortgage quote. That's the wrong way to go about it. You'll want to get quotes from multiple lenders. Check with a local bank, as well as a credit union, and get an online quote or two. Credit unions in particular offer creative mortgages that can save you money.
But know this: Each time a lender pulls your credit to give you a quote for a mortgage interest rate, it will ding your file. You can minimize the damage by getting all quotes within a 14-day period, so it doesn't look you're applying for multiple loans from multiple lenders each time. That will minimize any potential damage to your credit score.
4. Failing to negotiate junk fees
When you apply for a mortgage, you'll face a variety of junk fees. Many of them can be negotiated down or away altogether, but the key is knowing what to expect so you can take action!
Here are a few examples of "junk fees" to watch out for:
- Application fee
- Sign-up fee
- Broker fee
- Document preparation fee
- Messenger fee
- Loan origination fee
- Underwriting fee
5. Having no cash for a down payment
Depending on how much house you plan to buy, and where you plan to buy it, you may need a solid chunk of cash for a down payment. You will typically need a down payment of between 5% and 20% to get a conventional loan. And if you put down less than 20%, you will likely have to buy mortgage insurance.
Making sure you have enough cash to cover a down payment is key to ensuring a smooth home-buying process. Otherwise, you may have to put it off for a while.
6. Making yourself house poor
There are two parts to this:
- When you go to make a down payment on a house, you don't want to use everything you have in savings. So while it's crucial to save enough for that big cash payment, you really want to have more in savings than you plan to spend on the down payment.
- On top of that, what the bank says you can afford (based on how much they'll lend you) may not actually be what you can afford. Committing too much of your monthly income to mortgage payments is risky -- and it's a bad idea. You only want to spend up to one-third of your monthly income on housing costs, which include mortgage payments, insurance fees and any homeowner's association fees.
So when you're figuring out how much house you can afford, make sure to factor in other important expenses besides just bills -- things like saving for retirement, emergency expenses (medical, car repairs etc.) and even the cost of furnishing your brand new home. You probably won't be very excited about your decision if you're stuck in an empty house for two years because you can't afford to buy anything to put in it.
7. Not budgeting for the costs of actual home ownership
If you're going from renting to owning a house, the cost of home ownership can be quite a shocker. There's no more calling the leasing office or the landlord to fix things -- it's you who's on the hook now and you need to understand what all that entails.
Many first-time homeowners are surprised by all the expenses associated with owning a home, so it's crucial that you are prepared -- both mentally and financially.
You've probably already thought about the more "fun" expenses, like buying furniture, but don't forget about all those other not-so-glamorous costs -- such as replacing the water heater, hiring a plumber, hiring a landscaper, property taxes and so on. Then there are the even pricier expenses like replacing the roof. Plus, if the house is in an area that may flood, you will likely have to pay for flood insurance.
People do it every day, you just need to make sure you are prepared when it's time to transition to being a homeowner.
8. Not understanding the terms of your mortgage
Don't just sign the dotted line and don't just trust the word of the guy (or gal) who told you where to sign. You did all that hard work to make sure you got the best deal and prepared yourself in every possible way, so make sure you know exactly what you're signing up for.
By this point, you'll know what your monthly payments are, but that's not enough. You also need to know if the interest rate on your mortgage can change, and if it can, you need to know when and by how much. And you need to see all this in writing. Don't just take someone's word for it. If you don't quite understand the documents you're about to sign, ask a lawyer, or even family member or friend, to review the terms of the loan with you. You can do this ahead of time, but even if you get to the actual moment of signing and still don't understand something, don't sign it.
9. Not shopping around for the right home
You should look at a ton of homes! You can do a lot of the preliminary search online, but then go look in person. Get familiar with the area so you know what's a good deal and what's not. And start to understand more about the neighborhood where you're considering buying. Is it family friendly -- or does it have all the qualities you're looking for? Have you driven around (or even walked around) the area at night? You don't want to buy a house and then realize you're stuck in an area you aren't comfortable with -- and this goes for everyone in the family.
Originally posted at: Lafayette Real Estate News
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