By Mitch Mitchell – MORTGAGE SENSE
OCTOBER 13, 2021
Last month we wrote about mistakes for new homeowners. But we came up with a few more. Here you go!
Is it a good time to think about buying a home? That’s a personal question and only you can accurately answer it. The running joke is that a desperate real estate agent will tell you that the best time to buy is “right here, right now,” even if that’s not true. But the reality is that with interest rates still at historic lows, even a sketchy realtor might not be wrong. Sure, the housing market is on fire lately and bidding wars are more common than ever, but it’s on fire for a reason. Now IS a good time to buy — if you’re ready.
That leads us to this week’s topic: are you really ready to buy a home? Home buying is a substantial undertaking, involving plenty of paperwork and potential snags. And since everyone — especially first-time home buyers — could use some guidance, we’re here to help.
Let’s run through six of the most common home-buying mistakes and talk about how to avoid them!
YOUR EYES ARE BIGGER THAN YOUR BUDGET
It’s easy to get caught up in the whirlwind of excitement that happens when buying a new home. And if a bidding war happens — and you’re the type of person who has a fear of missing out — you could accidentally bid more than your budget will allow, even if you get pre-qualified for a larger loan. Don’t fall into this trap. You’ll be house-poor every month and have oodles of buyer’s remorse.
>> What to do? First of all, understand that getting pre-qualified is much different than getting pre-approved. Secondly, you want to have as much negotiation power as possible, especially if you live in a competitive housing market. Getting underwritten by a lender before shopping for a home makes any offer you put out there really stand out. It says, “I’m good for this amount of money and it’s safe to go to contract with me.” Start your pre-approval online so that you know how much house you can afford.
PUTTING IT OFF UNTIL YOU’VE SAVED UP 20%
Not long ago, a 20% down payment was the norm. But as home prices started to creep up, saving up 20% got even more difficult— especially for a first-time home buyer and especially in today’s high-priced market.
>> What to do? There are plenty of opportunities to buy a home with a low – or even no – down payment. Start by looking into a VA loan, a USDA loan or an FHA loan.
YOU NEVER CONSIDERED PMI
If you can’t come up with a 20% down payment, which can be challenging for first-time homebuyers in this market, you’ll probably need to pay private mortgage insurance (PMI) on your loan. This part of the monthly mortgage payment goes to protecting your property in the event of a disaster or accident. Like property taxes, your monthly insurance payments can be collected and held in escrow and directly paid to your insurance company. This can be a whopping figure that might be shocking if you’re not prepared for it. Mortgage insurance can be up to 2% of the entire loan amount. That’s a big pill to swallow.
>> What to do? The simplest — and frankly, only — way to avoid paying PMI is to come up with a 20% down payment. But depending on the type of home you’re looking to buy and the kind of financing you’re applying for, you may encounter different types of PMI. If you have no choice other than to take out a loan with private mortgage insurance, ask for one with terms that allow you to cancel as soon as you have 20% equity in the property or a loan-to-value ratio of 80%.
NOTHING LEFT IN YOUR SAVINGS ACCOUNT
Don’t be in a situation where you have to empty your savings account to cover your down payment and closing costs. If that’s the case, this is NOT the right house for you. And there are more expenses than just the mortgage, property insurance, title insurance, legal fees, home inspections and unexpected repairs. Even the basics like painting, new furniture and hiring movers don’t come cheap.
>> What to do? It’s common practice to put away 3-6 months of living expenses to protect you from emergencies like unemployment, medical expenses or replacing a hot water heater, that sort of thing.
NOT TAKING CARE OF YOUR CREDIT
We already touched on getting pre-approved before going house-hunting, but you’ll run into roadblocks if you don’t have a handle on your credit history and credit score. Key factors that make up a credit score are payment history, the total amount owed, the length of your credit history, types of credit in use and whatever new credit accounts you may have opened. Too much credit and you may be in trouble. Not enough and you may be deemed a risk. It’s a balancing act and you’re in control.
>> What to do? Be smart about credit and aim to use no more than 10% of what’s available. Make a concerted effort to reduce or eliminate debt before applying for a loan. And don’t close accounts in good standing. Regular, on-time payments are the solid foundation for a great credit score. See more tips on how to improve your credit score.
HIRING THE WRONG REALTOR
If you’re a first-time homebuyer — or even if you’re not — finding a compatible agent can be overwhelming! First, they’re super busy these days. And second, they always have their feelers out for their next client. Can you blame them? If it feels like your agent wants to close your transaction quickly so they can move on to the next, maybe you hooked up with the wrong one.
>> What to do? As a first-time homebuyer, you really need to try to find an agent who is patient, can guide you through the entire process and, above all else, is in this business to help people get into new homes without a lot of stress. The best way to find a reliable real estate agent is to get a referral. Then, ask friends or family members (zero in on those who own homes) if they have any recommendations. Our advice? Take your time & do your research, ask intelligent questions and come into the relationship prepared. Here’s a great blog on how to do just that!
Make no mistake about it!
Unless you’re in the market for a luxury yacht, buying a house will probably be the biggest purchase of your life. Depending on the terms of your mortgage, it’s a decades-long commitment. Home-buying can be exciting, but it can be complex — especially for newbies. But we’ve got your back!
Now that you know some of the mistakes to avoid, here’s something you shouldn’t avoid: Speak with a mortgage professional in your area who can look at your unique situation and tailor a mortgage that’s right for you.
If you’re feeling vibes that say you’ve got this, great. Apply online with the Movement Mortgage Easy App. This tool will help you get pre-approved quickly by letting you upload all required documents straight into the app.
ABOUT THE AUTHOR: MITCH MITCHELL
Mitch Mitchell is a freelance contributor to Movement’s marketing department. He also writes about tech, online security, the digital education community, travel, and living with dogs. He’d like to live somewhere warm.