Many people start their home buying process without a real understanding of what it takes be a homeowner.
In fact many of them don’t even know the upfront costs when buying a house — including a down payment, closing costs, repairs, and so many others.
They think that if they have a sizable down payment and a stable job, that its smooth sailing from here. Well, not quite…
This lack of knowledge can lead them to make costly mistakes, including paying thousands of dollars extra in loan interest, defaulting on their home loan, or going bankrupt. The following are some of the biggest mistakes made when it comes to buying a house.
1. Not Figuring Out How Much House You Can Afford
Without knowing how much house you can afford, you might waste a lot of your time and energy. You could end up looking at houses that you can’t afford yet, or not in your ideal conditions or location that you can actually afford. Your time is valuable so treat it that way.
For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won’t keep them up at night, generally no more than 30-40% of your monthly income. Aiming lower and not trying to max what the bank says you pre-qualify for can be and effective way to build a sort of saftey net.
To avoid this mistake: Use a mortgage calculator to help you know what price range is affordable, what’s a stretch and what’s overly aggressive. And don’t forget if it’s your first time to leave a little extra breathing room for those big expenses expected with years of home ownership.
2. Getting Only One Rate Quote
Getting a loan to purchase a house is the most expensive financial decisions most people make their entire lives. So it’s important to have the best mortgage rates possible so you don’t end up paying thousands or tens of thousands of dollars extra in interest over the life of the loan.
Yet, time and time again I see friends and family only speak with one lender when buying a home. This is a big mistake! When you speak with one lender, you don’t know what other mortgage rates are available to you. A good mortgage rate means less interest. I get 3 quotes, normally anything past 3-5 there is a smaller variation from the other loans.
Shopping for a mortgage is like shopping for a car or any other expensive item: It pays to compare offers. You or someone you know probably spends alot of time shopping for a car. But hardly spend a fraction of that when buying a home.. on something that can be more financially substantial that all the cars they buy over the life of that mortgage! According to Consumerfinance.gov, almost half of borrowers don’t shop for a loan.
To avoid this mistake: Apply with multiple mortgage lenders. A typical borrower could save hundreds in interest in the first year alone. If you’re worried about your credit score going down from all these inquiries don’t, mortgage applications made within a 45-day window will count as just one credit inquiry.
3. Not Checking Credit Reports and Correcting Errors
One of the most important things a mortgage lender looks at when deciding qualifying you for a mortgage loan is your credit score.
Yet, many don’t know the importance of maintaining a good credit score. Lacking that fundamental knowledge could cost them a lot. One is that you will have a harder time getting qualified for the loan.
Second, even if you do qualify, you will likely get a high mortgage rate. A high mortgage rate can cost you thousands of dollars in interest – money that you could contribute towards savings, investments, and retirement.
Once you have an idea of what your credit score is through your credit report, take steps to improve it. One way to raise your credit score is not to max out your credit limit.
Maxing out your credit cards can hurt your credit score significantly. Ideally keeping your credit utilization rate under 30 percent.
Another way to improve your credit score is to pay your bills on time. Payment history accounts for 35% of your overall credit score making it very important to pay your bills promptly.
Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and if so at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.
To avoid this mistake: You should use your free credit report each year from all three of the main credit bureaus. You should also dispute any errors you find.
4. Making a Down Payment That’s Too Small
A down payment on a house is arguably the most important factor when it comes to buying a house. Unless you are so wealthy that you can buy a house with outright cash, you will need to come up with a down payment.
The recommended down payment is 20% of the home purchase price. But many first time home buyers can be qualified for a FHA loan, where the down payment is 3.5%.
However, the disadvantage of putting less than 20% is that you will have to pay Private Mortgage Insurance (PMI). A PMI is extra fee added to your monthly mortgage payment.
Another disadvantage is that it will take you longer to pay off your mortgage. And your monthly mortgage payments will be much more.
One way to not have to worry about a PMI is to save for a 20% down payment before starting the home buying process. Saving for a down payment should not be that hard if you have a savings strategy in place.
Related: 10 Ways to Maximize Savings in 2020
You don’t have to make a 20% down payment to buy a home. Some loan programs allow you to buy a home with zero down or 3.5% down. Sometimes that’s a good idea, but homeowners occasionally have regrets and it inherently carries more risk.
Use Mortgagecalculator.org when looking at how much of a down payment to use, balance this with how much you can afford monthly.
To avoid this mistake: A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments. The downside of taking the time to save more money is that home prices and mortgage rates are always changing, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase. The key is making sure your down payment helps you secure a payment you can comfortably make each month.