5 Mistakes New Homebuyers Should Avoid
By Polyana da Costa / Bankrate.com
First-time homebuyers often learn the hard way that making a wrong turn during this process is costly and stressful. Sometimes it leads to a failed deal.
Getting approved for a mortgage, finding the right agent, searching for the perfect home and staying within a budget are some of the challenges buyers must face before they become homeowners.
Here are five common mistakes first-time homebuyers should avoid.
More to it than mortgage payments
Many first-time homebuyers decide to buy when they feel ready for a mortgage. But just because they can afford the mortgage payments doesn’t mean they can afford to own a home, said New York attorney Rafael Castellanos, a managing director at Expert Title Insurance.
“They have an idea of what their mortgage payment is going to be, but they don’t realize there’s much more to it,” he said.
Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs first-time homebuyers tend to overlook when shopping for a place.
“Keep in mind property taxes and insurance have a tendency of going up every year,” Castellanos said. “Even if you can afford it now, ask yourself if you’ll be able to afford the increased costs later.”
Even though it’s your first home, you must think of it as a long-term commitment, said Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois.
“Ideally, you should picture yourself living in that house for five to seven years,” Conarchy said.
Looking for a home first and a loan later
Homebuying doesn’t begin with home searching. It begins with a mortgage prequalification — unless you’re lucky to have enough money to pay cash for your first house.
Often, first-time homebuyers “are afraid to get prequalified,” said Steve Anderson, a broker and owner at Re/Max Benchmark Realty in Las Vegas. They fear the lender may tell them they don’t qualify for a mortgage or they qualify for a loan smaller than expected. “So they pick a price range out of the sky and say, ‘Let’s go look for a house,’ ” Anderson said.
And that’s not how it should be done. Yes, it’s more fun to go look at houses than to sit in a lender’s office where you have to expose your financial situation. But that’s a backward approach, Conarchy said.
“You get preapproved, and then you find a home,” he said. “That way you’ll make a financial decision versus an emotional decision.”
Not getting professional help
New homebuyers will need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer.
Venturing into this process alone, without professional help, is not a good idea, Anderson said. While every rule has its exception, generally, first-time buyers should not try to deal directly with the listing agent, he said.
“If you are getting divorced, are you going to go to your husband’s attorney for help? Of course not,” he said. “Same here. If you go to a listing agent, they are only going to show you their listings. You must find a buyers agent to help you.”
If you hire an agent without a referral from friends or family, ask the agent to provide references from previous buyers. The same goes for loan officers or mortgage brokers.
“It’s very hard for first-time homebuyers because they don’t know who they are dealing with,” Anderson said.
It’s crucial to find a professional who will give you “truly independent advice,” Conarchy said.
Using entire savings on the down payment
Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make, Conarchy said.
“Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” he said.
Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge, Conarchy said.
“I’d take paying for mortgage insurance any day over not having money for rainy days,” he said.
Getting new loans before deal is closed
You have prequalified for a loan. You found the house you wanted. The contract is signed and the closing is in 30 days. Don’t celebrate by financing another big purchase.
Lenders pull credit reports before the closing to make sure the borrower’s financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing.
Buyers often learn this lesson the hard way.
“They sign the contract and they want to go buy new furniture for the house or a new car,” Anderson said. “I remember one case where just before closing, the buyer drove to the office and said, ‘Look at my brand-new car.’ I told them, ‘You’d better go back to that dealership.’ ”
Luckily, the dealership agreed to wait a couple of days to report the loan to the credit bureau, he said. Otherwise, it could have killed the deal.
Author: Mona Thind
July 1st 2015
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