5. Ignoring VA, USDA and FHA Loan Programs
A lot of first-time home buyers want to or need to make small down payments. But they don’t always know the details of government programs that make it easy to buy a home with little to no money down.
To avoid this mistake: Learn about the following programs:
VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. They’re for people who have served in the military. VA loans claim to fame is that they allow qualified home buyers to put zero percent down and get 100% financing. Borrowers pay a funding fee in lieu of mortgage insurance.
USDA loans can be used to buy homes in areas that are designated rural by the U.S. Department of Agriculture. Qualified borrowers can put zero percent down and get 100% financing. You pay a guarantee fee and an annual fee in lieu of mortgage insurance.
FHA loans allow for down payments as small as 3.5%. What’s more, the Federal Housing Administration can be forgiving of imperfect credit. When you get an FHA loan, you pay mortgage insurance for the life of the mortgage, even after you have more than 20% equity.
6. Applying for Credit Before the Sale is Final
One day, you apply for a mortgage. A few weeks later, you close, or finalize, the loan and get the keys to the house. The period between is critical: You want to leave your credit alone as much as possible. It’s a mistake to get a new credit card, buy furniture or appliances on credit, or take out an auto loan before the mortgage closes.
Here’s why: The lender’s mortgage decision is based on your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments. Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio. Neither of those is good from the mortgage lender’s perspective.
Within about a week of the closing, the lender will check your credit one last time. If your credit score has fallen, or if your debt-to-income ratio has gone up, the lender might change the interest rate or fees on the mortgage. It could cause a delay in your closing, or even result in a canceled mortgage.
To avoid this mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. It’s OK to have all those things picked out ahead of time; just don’t buy them on credit until after you have the keys in hand.
7. Underestimating the Costs of Being a Homeowner
After you buy a home, the monthly bills keep stacking up. This can come as a surprise if you’re not ready.
There’s more to its that just the monthly mortgage payment. Other things you will be paying for include: the oil bill, gas bill, cable/internet bill, phone, home repairs and maintenance, all these things that the bank won’t care about when qualifying you for a mortgage
Renters often pay these kinds of bills, too. But a new home could have higher costs — and it might come with entirely new bills, such as homeowner association fees, and bigger repairs often covered by the property owner.
First-time home buyers are frequently surprised by high repair and renovation costs. Buyers can make two mistakes: First, they get a repair estimate from just one contractor, and the estimate is unrealistically low. Second, their perspective is distorted by reality TV shows that make renovations look faster, cheaper and easier than they are in the really are.
To avoid these mistakes: Work with a real estate agent who can tell you how much the neighborhood’s property taxes and insurance typically cost. Ask to see the seller’s utility bills for the last 12 months the home was occupied to give you a good idea of how much it will be year round.
Assume that all repair estimates are low. Seek more than one estimate for expensive repairs, such as roof replacements. A good real estate agent should be able to give you referrals to contractors who can give you estimates. But you also should seek independent referrals from friends, family and co-workers so you can compare.
The Bottom Line
The homebuying process can be a very stressful process wether it’s your first time or 5th. All kinds of unexpected problems can and will pop up – these can include hidden damage, lower than expected loan approval, and higher than expected closing costs. It’s an unpredictable process, but the more you know going into this process, the easier it is to avoid making these easy to avoid mistakes.
Share any mistakes you’ve witnessed or made yourself in the comments below.