One of the best milestones in one’s life is being able to have his own house. As such, buying a home is a big-time decision that needs a lot of thoughts and causes a lot of stress. It is especially harder for first-time buyers going through the financing process.
Getting a mortgage can be confusing or overpowering for a newbie — unless you’ve done your homework and armed yourself with the important information. Here’s the good news. You can have a peaceful and worry-free experience if you can avoid these mistakes:
1. Failing to understand the true cost of homeownership
If you used to rent a home, you now have to start changing your perspective. As a tenant, you only worried about your monthly rent, some of your utilities and other related expenses such as internet and cable subscription. But when you have your own home, you will be responsible for costs that your landlord previously covered.
Now, you will have to take care of the water bill, sewer and garbage collection bills, lawn care, and monthly Homeowners Association (HOA) dues if you’re buying a condo. Oh, let’s not forget the property taxes and homeowners’ insurance. Plus, you’ll have to set aside a budget for repairs and maintenance to keep your home in tiptop shape. That’s about 1% to 3% of the purchase price of the home.
2. Letting your emotions influence your decisions
You’d better expect to go through a long and sometimes frustrating experience when buying a home. Nowadays, there is a high demand for starter homes, so they sell out fast. It’s natural for first-time homebuyers to be unsuccessful in the first offers they make.
The rejection can make you lose focus. When that happens, you can sometimes obsess yourself with a house that’s out of your budget or fall into a bidding war and end up spending more than what you wanted.
You may find one house that just thrills you to the bone — that reaction is not bad. Just don’t do anything that would compromise your position, financial or otherwise.
3. Overlooking hidden costs
As we’ve said, you shouldn’t only think of the monthly mortgage payment but also account for the cost of home maintenance, property taxes, utilities, and other related expenses. If you happen to be acquiring an older home, you may have to spend a bit to repair and renovate the house.
You may use the selling price as your gauge for how much you should spend but don’t forget to check all the extra costs that you might need to pay to preserve your home and keep your property tax payments current.
Listen to this: you might not get the most accurate information about these things from your lender or realtor, so we suggest you do your own research. A home inspector would be a better source of information. He can give you a list of current or probable problems with the house that may happen sooner rather than later.
You can get quotes from renovation specialists, builders or contractors in the area to have more realistic prices on potential updates and home enhancement projects. Lastly, don’t skip the cost of moving your things and the extra furniture you will need to fill out your roomier home.
4. Making assumptions about the down payment
Many first-time homebuyers immediately assume they need to put down a big down payment than what they actually do. We often get the question: “Can I pay less than the usual 20% down payment?”.
Believe it or not, you can. Some lenders will let you put in a down payment of as low as 3% or 4%. However, as the market continues to appreciate (pulling the home prices upward) and interest rates go the same way, the value of your down payment money goes the opposite way. As your money depreciates, you’ll learn that the waiting will cost you money.
5. Spending your entire budget
When a lender sends you a pre-approval or pre-qualification letter, they will tell you the maximum amount you can borrow. Here’s the key: you don’t have to spend all of it just because a lender makes it available for you. Remember that it is a loan that you will have to repay for a long time.
Lenders would often have rules that set how much you can borrow. For example, the 28/36 rule says you should not spend more than 28% of your gross monthly income on housing expenses and no more than 36% on your total debt.
But you know that buying a home is not an ordinary expense. It will come with material upfront costs such as the down payment and closing costs. You want to keep your financial balance so that when emergencies and other sudden expenses come after you close, you’ll have money for them.
