5 first-time home buying mistakes
I am considering buying a home for the first
time. I have approximately enough for a 3-percent down payment. However, paying
3 percent will deplete my savings. I owe approximately $22,000 in student loans
and $7,500 on my car. I do not have any credit card debt. Should I be working
on buying a home, or should I consider paying down the debt that I have? FYI:
Currently my rent payment is $535, however, this will more than likely increase
by $100 to $200 by July. Buying a home may put my payment at $1,200 a month. --
Ah, spring is a time for romance, and first-time home buying! Timing
for a first home purchase is important and depends a great deal upon your current
financial situation. For most of us, our homes are the largest expenditures and
investments we make, and making them at the right time financially can be critical
The top five mistakes of first-time home buyers:
1. Applying for a mortgage with unresolved credit issues.
2. No savings for
a down payment and closing costs or borrowing to cover the down payment.
Going house hunting before being pre-approved for a mortgage.
4. Being unfamiliar
with the home buying process.
5. Underestimating the expenses involved with
homeownership other than the mortgage payment.
You have the
down payment secured, so that is one step in the process that you have already
The first thing I would recommend is for you to
look at your current expenses and determine if you can comfortably afford a mortgage
payment. Don't just include the principal and interest payment, which will remain
the same in a fixed mortgage. Also include property taxes and insurance, which
tend to rise every year. Add up your other expenses (including your school loan
and car payments). In some areas of the country housing is more expensive than
others, but as a general guide your mortgage payment should not exceed 35 percent
of your gross income and your debt payments (loans and credit cards) should not
exceed 20 percent.
In addition, since you will be depleting
your savings for a loan down payment, make sure you incorporate into your monthly
expenses a set amount to rebuild your savings.
If you have
not already, obtain copies of your credit report from all three credit
bureaus to assure that you know your current credit standing. Dispute
any inaccurate information on the reports. If the report shows accurately
that you have some overdue or missing payments, pay them.
next step is to visit with a mortgage lender and get pre-approved for a mortgage
-- not just pre-qualified.
Getting pre-qualified -- in which you provide unverified financial information
to a lender -- is an OK start, but when you get serious about house hunting, get
pre-approved. In that step, you allow the lender to pull your credit report and
verify your financial information. In exchange, the lender gives you a letter
stating you definitely will qualify for a loan of a certain amount. Since you
know that you have a 3 percent down payment, you may have already completed this
Finally, it is important to know that as a homeowner
you will have additional expenses related to your home. Most homes have a yard
to maintain that requires equipment. Some homes do not come with appliances included,
and if you are buying an existing home, you may need to repair or replace things
such as heating equipment, water heaters, leaky roofs, or perform other maintenance.
It is a good idea to save money in a home maintenance account for ongoing needs
associated with your home.
As to your specific situation, the
student loans, while not small, can be paid over a long time at a reasonable interest
rate. If you can, consolidate
your student loans at today's record-low rates. The car loan doesn't seem
too bad, and the rent increase is less than the house payment will be. I'd feel
better if you had a cushion to fall back on, after you put the 3 percent down,
before going ahead.
Also, in many parts of the country, house
prices are at very high levels. This is, in part, due to the low interest rates
available. Over the next year or two I expect that rates will go up and, as a
result, prices will stabilize or even fall. This would be a better time to buy.
In the meantime, I don't recommend you pay down your two debts; I'd rather see
you accumulate more savings before you commit. A first home is an exciting milestone
event in your life, Jill and you are on track to realizing it. Hold a steady course
and don't jump in too soon.
I wish you the best of luck.
Debt Adviser, Steve Bucci, is the president of Money Management International
Financial Education Foundation. Visit MMI
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advice or click here
to ask a debt question.