I was a first time home buyer once and I made plenty of mistakes the first time around. In this post I’ll go through 8 costly mistakes first time home buyers make so you can avoid them.
The most expensive thing you will ever buy will be your house. Buying your first house can be one of the happiest times as well as one of the most stressful times in your life. It’s a really big decision. You have to decide on the size, location and the cost. But there’s so much more to consider than that. It is precisely these “extra” things that new home buyers ignore that get them into trouble.
Here are 8 mistakes first time home buyers make.
1. You Got The Wrong Mortgage
There are many loan options available for first time home buyers. There’s adjustable rate loans (ARM), interest-only loans, 30 year and 15 year mortgages. There are so many options, so how do you decide which one to choose?
The lowest payment may not be the best. What if you got stuck on an interest-only loan? Sure the payment is low, but you’re not even paying off your house.
Then, when the rate adjusts (because it can’t be interest-only forever), you’ll be faced with a huge payment increase and may not be able to make the payments. So as a result your credit takes a hit and you end up losing your home to foreclosure as well.
So how do we avoid this? Simple, never get an adjustable rate mortgage. Stick with a 30 year (or 15 year) fixed rate mortgage. Slow and steady wins the race, and there’s no tricking a mortgage. Don’t fall for any of the dirty tricks from loan officers and get stuck on an adjustable rate loan.
2. You Didn’t Fix Your Credit First
Before you even think of buying a house, make sure your credit is on point. If you wait until the last minute to check (and fix) your credit, you may be in for a bad surprise.
Just when you find the house of your dreams and are ready to make an offer, you go get a loan from the bank and they reject you for having a low credit score.
Then when you finally get your report you see that it’s full of mistakes and even debts you didn’t know you had. It can take months to fix your credit, so it’s best to get started as early as possible.
3. You Didn’t Pay Off Your Debt
When you apply for a mortgage, the loan officer will check what is called your debt to income ratio. You need to keep it under 43%. The lower the better.
In order to have a better ratio, you’ll need to pay off your debt until you have zero monthly debt obligations.
To calculate your debt to income (DTI) ratio, get your monthly debt obligations and divide it by your monthly income. Say your bills are $1400 per month and your income is $3100 per month. Your debt to income ratio would be 1300/3100 = 42%.
This means that if you make $3100 monthly your new mortgage and all of your other bills must equal less than $1300 in order for you to qualify for a loan.
So if you’re anywhere near 40% or higher, you must first pay off your debt and get the percentage lower.
4. You Didn’t Save For A Down Payment
If you want to buy a house but don’t have a lot of money saved up, you will end up having to pay something called private mortgage insurance (PMI). You will pay this until the difference between the value of your house and the loan are 20% apart from each other. This means that for a house valued at $500,000 you will pay PMI until your loan is $400,000.
The solution here is to only buy a house when you are able to put a 20% down payment. By doing so, not only will you enjoy a lower monthly mortgage payment, but you won’t have to pay PMI.
5. You Bought A House That Was Too Big
Just like you stay on budget when you go shopping, you need to also adhere to a strict budget when you’re buying a house.
Big houses are beautiful, especially if you’ve been living in an apartment. But don’t go overboard when you’re looking for homes to buy. You should use a mortgage calculator to calculate how much house you can afford. Then, stick to your budget and get a house that is too big.
Even though the bank may be willing to give you a loan on an expensive house, don’t take the bait. They are banking on you not being able to afford the high payments and soon enough your dream home will be theirs.
How much house can you afford? Only get a mortgage payment that is one third or less than your monthly income. Keep in mind that when I say mortgage payment, I mean principal, interest, homeowners insurance and county taxes combined!
6. You Bought A Fixer-Upper
First time home buyers should avoid buying a house that needs a lot of work. You’re new to the whole process of buying and maintaining a home. What this means is that you have yet to fully experience the high costs of being a homeowner.
It is nothing like renting. When you own a home, you are responsible for fixing everything, paying for insurance and taxes. If you choose to go with a fixer upper, you may soon find out that the costs to repair the home could skyrocket out of control. Then, your so called good deal turns into an expensive nightmare.
7. You Were Better Off Renting
There’s a big debate about whether buying a house is better than renting. I stand on the side that being a homeowner wins every time. The reason being that when you’re done paying the mortgage off, you get a huge relief and you’ll spend less in retirement. Another reason why owning a house is better than renting is because rent prices go up while your fixed rate mortgage payment will stay the same.
But I understand that owning a house isn’t for everybody. Some people are just not ready to buy a house yet. Here are some of the reasons you may be better off renting:
- your income is not stable.
- your job is not secure.
- your job may relocate you soon.
- you are not very handy around the house.
- you haven’t saved up for a down payment.
8. You Chose A Bad Neighborhood
Often times when first time home buyers are looking for their dream home, they look at pictures of the house. But did you know that the house itself isn’t what matters? It’s the location that counts more toward the value of the home.
A mistake first time home buyers make is they do not fully research the community.
Did you check the crime rate? Did you check to see how many sexual predators live nearby? Did you check the parking situation? Did you check the rating of the nearby schools?
When you buy your first home, you’re picking a place to raise a family, so the neighborhood is just as important, if not more important than the house itself.