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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, says New York attorney Rafael Castellanos, president of 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 says.
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The other expenses
Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time homebuyers tend to overlook when shopping for a place.
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"Keep in mind property taxes and insurance have a tendency of going up every year," Castellanos says. "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, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois.
"If you have to switch jobs in a year or two, and may have to move for the job, you should think twice," says Conarchy. "Ideally, you should picture yourself living in that house for 5 to 7 years."
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," says 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 says.
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First things first
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 says.
"You get preapproved, and then you find a home," he says. "That way, you'll make a financial decision versus an emotional decision."
Not getting professional help
New to the homebuying game? You'll 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, says Anderson. While every rule has its exception, generally, first-time homebuyers should not try to deal directly with the listing agent, he says.
"If you are getting divorced, are you going to go to your husband's attorney for help? Of course not," he says. "Same here. If you go to a listing agent, they are only going to show you their listings. You must find a buyer's 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 says.
It's crucial to find a professional who will give you "truly independent advice," Conarchy says.
Sometimes that means hiring a lawyer, says Castellanos.
"You are about to make what is possibly the largest single investment of your lifetime," Castellanos says. "You want to make sure it's done right."
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Using up 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 says.
"Some people scrape all their money together to make the 20% 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 says.
It's risky to deplete savings
Homebuyers who put 20% 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, says Conarchy.
"I'd take paying for mortgage insurance any day over not having money for rainy days," he says. "Everyone -- especially homeowners -- needs to have a rainy-day fund."
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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.
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Why you should keep your wallet shut
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, especially first-timers, 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 says. "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 bureaus, he says. Otherwise, it could have killed the deal.