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Top 5 first-time home buying mistakes


Dear Steve,
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. -- Jill

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Dear Jill,
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 to success.

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.
3. 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 completed.

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.

The 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 step.

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.

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation. Visit MMI for additional debt advice or click here to ask a debt question.

-- Posted: March 26, 2004




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