Is Homeownership Your Goal? We're Covering Those Common Mistakes For First-Time Homebuyers
Whether you are purchasing clothes, a car, or a house, the likelihood of buyer's remorse is directly proportional to how substantial the investment is. Of course, the risks will only magnify if it's your first time investing in a property.
A home is such a blessing until it is not, especially if the mistakes you commit already hurt your pockets. According to the Home Buyer Report, more than 8 in 10 millennials are dissatisfied after investing in a home for the first time.
The top complaints of survey participants include:
- Paying exorbitant interest rates.
- Realizing they don't like the neighborhood after all.
- Investing in a home when they were too young.
- Spending too much on a fixer-upper.
- Knowing their house value has plummeted.
- Recognizing that the home mortgage already eats a significant portion of their budgets.
Thankfully, you still have time to avoid these pitfalls that ruined the finances of some first-time home buyers.
1. Not factoring in the closing price, moving costs, and other expenses
Buying a house does not stop at some magic number. So, the worst thing you can do is set the house price to match your budget ceiling. You always have to make room to cover the anticipated and unanticipated costs.
For instance, in Minnesota, the cost per hour of hiring movers is between $150 and $300, depending on the number of bedrooms in your house. Closing costs, meanwhile, range from two percent to seven percent of the property's total value. So, at the very least, you must ask the seller if they will cover the closing cost.
For example, if your house costs $250,000, you are looking somewhere between $4,000 and $17,500 that you pay the attorney, property inspector, and home appraiser. However, closing costs may be expensive but worth your investment. The home inspector, for example, will save you a fortune if they find a potential lingering problem in your property that the seller deliberately hid from you.
Armed with this new information, you can bargain for a more favorable price or abandon the deal altogether. Don't be afraid to leave what seemed like a sweetheart deal. The other expenses you must consider include utilities, property taxes, homeowner's association fees, insurance, HOA fees, and maintenance cost.
2. Purchasing mortgage points to save money
Mortgage points refer to the fees the lender offers that supposedly bring down your interest rate. The scheme works like prepaid interest, where one point equals one percent.
So, for example, if your loan amount is $200,000, you essentially purchased $2,000 for one point. If the seller doesn't buy them for you, find another home you can afford without buying mortgage points.
Ultimately, you are only deferring the debt, so the upfront buydown costs are just added expenses you don't need. The fine print that some don't realize is most homebuyers refinance or sell their homes before reaching the breaking-even point.
Instead, if you have extra money, opt for a shorter-term mortgage or use the cash to increase your down payment, which also lowers the interest rate. In fact, an experienced realtor will advise you to max out your budget for your down payment. This decision will save you a lot of grief later.
3. Never take out a mortgage if you are swimming in debt
If you are on the verge of drowning, the last thing you need is more water. So instead, use all your energy to make your obligations manageable. While you can't entirely get out of debt, you can avoid feeling cornered, with no way out of your situation other than declaring bankruptcy and losing your home.
After writing an agreement, first-time homebuyers may think their housing loan is already approved. So, because of their excitement, some homebuyers get ahead of themselves by buying furnishings and furniture with their credit card. They fail to realize that the last stage involves the final underwriting, which essentially is a process where the underwriter will assess all your finances to determine eligibility.
The lender will drop you like a fly if you are too much of a risk. Besides, taking on an additional mortgage increases your financial burden, making it difficult to meet timely payments on all your debts. Therefore, you must carefully assess your situation and determine whether buying a house is wise. Don't over-purchase and buy a place you cannot afford to keep.
So, if the house seemed too expensive, your knee-jerk response should not be, "I'll only take out more mortgage." Nevertheless, you can avoid all this hassle if you work with a licensed realtor who will tell you whether you can afford a house.
4. Picking the wrong mortgage vehicle
Choosing the wrong mortgage vehicle could cost you tens of thousands during the loan's lifespan. According to the National Realtors Association survey, homeowners stay in their purchased homes for about ten years on average before listing them on the market.
Some are willing to lose in the deal since they can no longer afford to maintain their homes. Most mortgages are designed as a honeytrap where the lender offers you a house with very little upfront cash. So, of course, the first-time homebuyer may think they are getting a good deal.
But, in reality, you will pay excessive interest rates and other associated fees. Among the worst mortgage vehicles to avoid as much as possible include the adjustable-rate mortgage, USDA, VA, and FHA loans.
The rule of thumb is to maximize your upfront cost and choose the shortest loan term possible. For instance, a 15-year fixed-rate mortgage is a sweet spot for most buyers.
5. Skipping mortgage preapproval
Don't skip mortgage preapproval (not just prequalification) - don't let the process of obtaining a loan slow down the negotiations; be ready in advance.
Prequalification is an initial step in the mortgage application process where a lender will review your documents, such as your income, debt, and credit score, to give you an estimate of how much you may be able to borrow. In contrast, preapproval is a more thorough evaluation of your financial situation.
It involves completing a full mortgage application and providing documentation such as income and employment verification, bank statements, and tax returns.
Be fully prepared in advance so you don't allow the process of obtaining a housing loan slow down the negotiations. For instance, don't assume a credit score will hamper your search for a dream home. Instead, find a lender who can provide manual underwriting to get you approved.
6. Picking up a house without the help of a REALTOR®
The convenience of the Internet will lull you into thinking you don't need a qualified realtor to help you find your dream home. Shopping without a qualified REALTOR® who really understands the market and how to negotiate your best interests can cost you valuable time.
Unfortunately, the absence of expert advice will also set you up for costly mistakes during negotiation and closing. For instance, Lori Millam even received the coveted Ramsey Trusted Seal.
Of course, industry insiders are aware of how much recognition means. But for starters, it means that Lori Millam will go over and beyond to guarantee customer satisfaction. Buying your first house is a totally overwhelming and even scary experience.
For example, you might have known someone who expressed buyer's remorse after putting their life savings into their home. But don't let it deter you from pursuing your dream of having your own home.
All you need is a professional who will guarantee that all boxes are checked so your big decision won't backfire to turn your dream into a nightmare.
