For most Americans, owning your own home is a dream that can come true. At credit.org, we’ve always advocated that homeownership should be part of your long-term financial plan, helping to build overall wealth and stability while improving your financial security during retirement years. Making the decision to pursue and ultimately become a homeowner is likely one of the most important decisions you will make. To make it a successful and rewarding experience, we’ve outlined the top 10 mistakes would-be homeowners make and ways to overcome them.
Purchasing a home is likely the biggest financial purchase most people make. Therefore, participating in a homebuyer education class, whether it be through an on-line self-study or webinar enabled course, or an in-person workshop, the course is an important step. Investing in this education will provide you with valuable insights about the homebuying process itself, the mortgage process, and key terminology, and what to expect to be a successful homeowner. Also, if you are an eligible first-time homebuyer, access to special kinds of loans and other benefits may be available to those that complete a U.S. Department of Housing and Urban Development (“HUD”) or Lender-approved Homebuyer Education Course. The earlier you seek out homebuyer education, the more helpful it will be for you. Don’t wait until the last step to get educated, remember knowledge is power.
Buyers seeking a mortgage loan should never take a loan from the first source offered without shopping around to get other offers. Your real estate agent might have a lender they prefer to work with, but you’ll never know if you’re getting the best deal unless you compare multiple offers. If you are concerned about too many inquiries on your credit, most credit score calculations will “bundle” all mortgage inquiries as a single inquiry, as long as they are made within a certain period of time, which is generally 45 days.
People tend to try to avoid seeking professional help, often because they are concerned about the potential costs of doing so as well there are many self-service options available via the Internet. When it’s time, however, to actually make an offer on a home or apply for a mortgage loan, the upfront costs are generally minimal. What’s important again, is that you are informed and knowledgeable on what to expect, what costs and fees are and who and when to use a professional services provider, such as a Realtor® or Mortgage Lender. The professionals who work in the real estate and mortgage industries earn their pay by helping you navigate the complicated waters of home ownership. As well, there are also many legal forms and documents involved in purchasing a home, from mortgage instruments and disclosures, home inspections and appraisals, so again educating yourself will arm you with invaluable information.
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When purchasing a home, be careful not to spend every dime on the purchase itself. With various costs involved, such as closing costs and mortgage fees, down payments and the like, the amounts can add up quickly. Be prepared and plan so that you will have some money on hand after the loan closes. Moving is never free and there are a host of things you may want or need in your new home, such replacing the door locks, adding window coverings, appliances or furniture, and of course you will want to add your personal decorating touch. Plan ahead by creating a budget for your post move in costs and always add a bit more for those unexpected repair items.
Once you’ve started the home-buying process, put a hold on additional borrowing! Many home buyers make the mistake of continuing to use credit and expand their debt level while in the mortgage application process. This should be avoided as excessive credit and debt can throw the entire home loan into jeopardy. When lenders see new applications for credit and loans pop up late in the game, higher debt levels can change your eligibility status for the loan. So, the best rule of thumb is to stay clear of any new credit inquiries or large purchases that will either reduce your cash savings or increase your debt levels as the best plan of action.
It’s not always under your control, but if you can avoid it, don’t make any changes to your employment status while you’re buying a house. That includes taking a leave of absence, sick leave, or making a change like switching to part-time. Any change to your employment status may throw up a red flag which again could alter your eligibility and loan approval.
Before buying a home, you’ll need to know more than just the property you’re buying. How is the surrounding area? Are the schools good? What are the crime rates like? A wise realtor once said that you should always visit the home you’re buying on a Sunday, so you can see what the neighborhood is truly like. We think that’s a great idea, and you should go even further. What’s it like on a Friday night? Do you hear loud music or other disturbances in the neighborhood? Another factor in scouting the location is the commute to work. Besides the sheer distance, what kinds of roads connect your new home to your place of business? How will traffic be every morning? Plan to swing by the home early one day and do a trial run to see what it’s like to get from there to work in the morning. Here’s another one to keep in mind: what kind of cell service do you get when previewing the home. If the house is in a “dead zone” for your wireless carrier, you might have to buy a range extender or special home antenna from your carrier—this can add to your monthly cell phone bill. It’s annoying to be in a place where you don’t have good cell phone reception, much less to live there! Finally, think about your neighborhood in a long-term sense. Is it on the decline, or is it improving? Are people fixing up houses or letting them fall apart? These kinds of things will determine how well your house holds its value and how quickly you’ll be able to sell it should the need arise.
People often buy “too much house” for their money when home shopping. They don’t know realistically what they can afford. When buying a house, it’s crucial to think about the total operating costs you’ll have every month. Ask the seller what gas & electric are costing them monthly. And don’t forget insurance, trash collection, HOA dues, internet access, and a myriad other household expenses. Get budget counseling, or at the very least, review some free educational materials and budgeting courses online before you commit to a new home. Make sure the monthly expenses work with your budget or you’ll be setting yourself up for failure.
A home is a great investment in that it brings you security and helps you build wealth, but it’s not the kind of investment where you get rich quick. Think of it more like a savings account; you put money in every month when you make your payments, and slowly build equity over time. No one should buy a home expecting to make a quick buck. Ultimately, owning a home should be part of your plan to reduce your expenses in retirement (by not having a house payment, you eliminate your #1 budget item), not a plan to cash a hefty check.
Real estate agents will tell you to talk to them first, before getting pre-qualified. Lenders say you should get pre-qualified before going to a realtor. Which should you listen to? All parties in a home-buying transaction have their own interests to consider. A realtor might push you to offer the max for a home, because they earn a percentage of the sale price. If you work with the seller’s agent instead of getting a buyer’s agent for yourself, you could risk being taken advantage of. We do recommend using professionals when buying a home, but be careful to protect yourself. If you are too trusting, you’ll pay more than you have to.
Your best bet is to start with someone neutral; a nonprofit organization that offers First-Time Homebuyer Education and housing counseling. A counselor that is approved by HUD can answer questions and give you impartial advice you can trust.
By doing a little homework up front and getting the right kind of help, you can avoid the top 10 mistakes homebuyers make. We can help; get started educating yourself in our FIT Academy online, or call for free counseling and advice.
