First Time Home Buyer Guide
Due to the complexity of a mortgage loan, it is easy for anybody to make a mistake. Everyone involved, including the loan officer, the underwriter, the appraiser and even the closing attorney can make an error. Normally, those errors can be easily fixed. However, in the case of the home buyer, a mistake can result in disaster. Here are some common first time home buyer mistakes and how you can avoid them.
First Time Home Buyer Mistakes Made with Credit
Do Not Change Jobs
Most people would welcome the chance to accept a new position if it meant more pay or better benefits, or both. It would also seem that a higher income would make a person’s credit profile more appealing to mortgage underwriters.
Unfortunately, that is not the case.
Part of the pre-approval for a home loan emphasizes stability. People that have worked at the same job for 2 years or more are considered a better risk than a person that changes jobs every few months.
The best advice is to keep your current job until you have closed on the home loan.
Do Not Finance a New Vehicle, Boat or Motorcycle
It is easy to understand why people get pre-approved for a home and then decide to upgrade their car or get a pleasure item such as a motorcycle or a boat. Considering the fact that their credit record and income are good enough to qualify for a home, it should be easy to get a lesser kind of loan for a vehicle.
However, this is one of the worst things that a person can do.
First of all, the lending institution that finances the vehicle or leisure craft will slightly lower your credit score when they run a credit check. Secondly, you now have more debt. These two items combined could cause the mortgage underwriter to deny your home loan.
Do not apply for any new loans while you are in the process of buying a home.
Leave Your Credit Cards Alone
The previous point stated that it is a bad idea to add new debt while you are trying to purchase a home. On the flip side of that, you should not do anything with your credit cards, besides making the monthly payments.
Here is the explanation. When the loan officer prepared your credit file for the underwriter, a large portion of your credit score was based on your ability to borrow more money. In financial jargon, this is called capacity.
If you run out and charge up a lot of stuff before closing on the home loan, it will reduce your capacity and reduce your credit score. Likewise, if you decide to close out an existing credit card that will also reduce your capacity.
Bottom line: Do not make any new purchases using your credit cards and do not close out any credit card during the loan process.
Budgeting for the Purchase and Mortgage Payments
Pre-Approval is Mandatory
Getting a pre-approval will open up so many doors for you when you are in the market to buy a home.
If you want to schedule a visit to a home represented by a real estate agent, the agent will want to make sure that you have true intentions of purchasing the home. The pre-approval letter proves your good intentions.
Likewise, if you contact a real estate agent and ask them to assemble a list of possible homes for you, they will need assurance that you are ready and able to buy a home. Providing a copy of the pre-approval letter shows the agent that you are serious about a purchase.
Include Room in Your Budget for Extra Expenses
Buying a home is so much more than just the mortgage payment plus escrow. All too many times, a young couple will buy their first home with no thought for future needs. Then when the roof needs replacing or the water heater bursts, they have no choice but to rely on credit cards or other forms of debt to take care of the issue.
Budgeting 10% to 15% of the monthly mortgage payment is an easy way to build up a nest egg each month. This will allow you to save up for future repairs without putting a big strain on your monthly budget.
Consider Doing Minor Repairs and Improvements to Save on the Purchase Price
It is normal for people to want a move-in ready property or even a brand new home. But sometimes the home that you really want could be slightly out of your price range. It makes more financial sense to purchase a home that is within your price range and simply need a good cleaning, some paint and possibly new carpet.
Most able-bodied people can handle a paintbrush along with the necessary clean-up that it takes to make a home look nice. This could save you a few thousand on the price of the home and keep you within your budget.
Do Not Put Your Hopes in A Future Higher Income
It is common for people fresh out of college with their first career-type job to anticipate a higher income within a few years. And to be honest, this is a common trend. But that does not mean it will happen according to your time table.
Buying a home with a payment that is at the very limit of your budget in hopes that your salary will rise in a year or two is a recipe for disaster. Just consider a few possibilities:
- Your company could get bought out by a larger corporation and reduce your salary
- Your company could make a mistake and close its doors for good
- Your department may be considered no longer useful and shut down, leaving you without a job
While this may sound like a gloomy outlook, it is quite feasible. All of these things do happen on a regular basis all across the country.
Investigating the Home and Surrounding Market
Pay for the Home Inspection
Anybody that is buying their first home should really pay for a home inspection. A professional inspector will look at the home with the goal of uncovering any problems. The problems could be quite minor, such as a small leak in a pipe under a sink. Or it could be a major issue, such as a crack in the foundation.
Getting a home inspection can either confirm that you have chosen a solid home that is ready for you to purchase or it can help you avoid buying a home riddled with problems.
Do Not Get the Most Expensive Home on the Block
Most people want to have a nice place that they can brag about to their family and friends. However, there is a common rule in real estate; don’t buy the most expensive home on the block.
There are a few reasons for this. First, while other homes around you may enjoy appreciation each year, your home is already the most expensive and will appreciate at a slower rate, if at all. Secondly, it can be difficult to sell if you find the need to move one day.
It is better to get a home that is closer to the mid-price range of the area that you have chosen.
Make Sure the Prices are Improving Over Time
Along the lines of the previous point, ask your real estate agent to review the home prices over the past 2 or 3 years to make sure the property values are going up. Property appreciation is a good thing. It means your home will be worth more as time marches on.
If the prices have stayed the same, or even decreased a bit, you may be buying a home in a depressed area.
Ask About Future Plans for the Area
While asking your agent about the home prices in the area, you should also discuss any future improvement plans for the general area. If there are plans for a new school, shopping area, hospital, or other large projects, it could likely increase the value of your home and bring you much equity in a short time.
However, if a new road is coming through that will wipe out part of your road, or a new interstate bridge that will almost be directly above
your property, that would be a bad thing. Either of those conditions would drop the value of your home and make it rather difficult to sell in the near future.
Social Mistakes Made with Buying a Home
Buy a Home that Meets Your Needs, Not Your Feelings
It is easy to get emotional with the purchase of a property. Proving to yourself and the world that you are mature enough and financially stable to the point that you can buy a home is a big achievement. But this does not mean you should buy a home that does not fit your needs.
If you have a small family and a large dog that likes to play outside, it may not be a good idea to buy a small condo. A home with a nice yard would be a better fit for you.
On the other hand, if you were married 3 months ago, and have no plans for children, getting a 4 bedroom home with a large yard could be overkill.
Decide on the features that you need, along with the right location for your job and your interests, and let those things guide your decision.
Don’t Buy Just to Impress
Some people feel a strong amount of pressure to impress their parents or their siblings or some other family member. This leads them to purchase a home that is either too expensive or too big for their needs.
Most first time home buyers fail to realize one important point; getting approved to buy a home is impressive to most people in and of itself.
Buy a home that you can afford and that fits with your lifestyle. Let others think what they will, because you can’t change their thoughts anyway.
Summing Up First Time Home Buyer Mistakes To Avoid
Buying a home is unlike any other type of purchase. If you decide that you don’t like the home a week, or month, or a year after you buy it you cannot simply return it to the previous owner and get a refund. Take the time to investigate various homes and to really look at your overall budget. Follow the advice of your lender and real estate agent. By paying attention to these professionals, and taking heed to the points mentioned above, you should be able to avoid any major problems while qualifying for your first home purchase.
Helpful First Time Home Buyer Resources:
Avoid Common Causes of Mortgage Delays by Dustin Brohn
Save Money For A Down Payment by Kyle Hiscock
How To Buy The Right House In a Great Neighborhood by Shannon Holmes
Reasons Why Sales Contracts Come In Higher Than Appraisals by Tom Horn
First Time Home Buyer Advice by Kevin Vitali