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Thinking about buying your first home? Before you can unlock the door to homeownership, you have to take some important first steps. From finding the perfect location to financing your purchase, shopping for your first home has challenges that go beyond curb appeal and interior features.
Some of the important steps to homeownership include:
- Getting approved for a mortgage.
- Choosing the right estate agent.
- Finding the right home that fits your budget.
Here are five common mistakes first-time homebuyers should avoid.
1. 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 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.
Property insurance, taxes, property management fees, maintenance, and higher electric and water bills are some of the costs that first-time homebuyers tend to overlook when shopping for a place.
“Keep in mind utility bills and insurances which 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.”
2. Looking for a home first and a loan later
Homebuying doesn’t begin with home searching. It begins with a mortgage pre-approval — unless you’re lucky to have enough money to pay cash for your first house.
Often, first-time homebuyers “are afraid to get pre-approval,” says Steve Anderson, a broker and owner at Re/Max Benchmark Realty. 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.
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, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage.
“You get preapproved, and then you find a home,” he says. “That way, you’ll make a financial decision versus an emotional decision.”
3. Not getting professional help
New to the homebuying game? You’ll need a reputable estate agent, a good mortgage advisor, and solicitor.
Venturing into this process alone, without professional help, is not a good idea. While every rule has its exception, generally, first-time homebuyers should not do it alone, Anderson says.
“If you are getting divorced, are you going to go to your husband’s solicitor for help? Of course not,” he says. “Same here. If you go to one estate agent, they are only going to show you their listings. You would be best to find selection of range estate agents to help you.”
If you find an estate agent without a referral from friends or family, ask the estate agent to provide references from previous buyers. The same goes for solicitors 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.
4. 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 as large as possible percentage down payment so they don’t have as much back in repayments, but they are picking the wrong poison because they are left with no savings at all,” he says.
“I’d take paying a little extra on the mortgage 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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5. Getting new loans before the deal is closed
You are pre-approved for the mortgage. You found the house you wanted. The contract is signed and is completing 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, 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 completing, 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.
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