Buying a home? This mortgage mistake can cost you

12 First-Time Home Buyer Mistakes and How to Avoid Them

Buying a home? This mortgage mistake can cost you

Every year, first-time home buyers venture into the market and make the same mistakes that their parents, siblings and friends made when they bought their first houses.

But today’s novice buyers can stop the cycle. Here are 12 mistakes that first-time home buyers make — and what to do instead.

Get answers to questions about your mortgage, travel, finances — and maintaining your peace of mind.

1. Not figuring out how much house you can afford

Without knowing how much house you can afford, you might waste time. You could end up looking at houses that you can't afford yet, or visiting homes that are below your optimal price level.

For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won't keep them up at night. Sometimes it's a good idea to aim low.

How to avoid this mistake: Use a mortgage affordability calculator to help you know what price range is affordable, what's a stretch and what's aggressive.

» CALCULATE: How much house can I afford?

2. Getting just one rate quote

Shopping for a mortgage is shopping for a car or any other expensive item: It pays to compare offers. Mortgage interest rates vary from lender to lender, and so do fees such as closing costs and discount points.

“Mortgage applications within 45 days count as one credit inquiry.”

But according to the Consumer Financial Protection Bureau, almost half of borrowers don't shop for a loan.

» MORE: 5 tips for finding the best mortgage lenders

How to avoid this mistake: Apply with multiple mortgage lenders. A typical borrower could save $430 in interest just in the first year by comparing five lenders, NerdWallet finds. All mortgage applications made within a 45-day window will count as just one credit inquiry.

3. Not checking credit reports and correcting errors

Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that's higher than you deserve. That's why it pays to make sure your credit report is accurate.

See your free score anytime, get notified when it changes, and build it with personalized insights.

4. Making a down payment that's too small

You don't have to make a 20% down payment to buy a home. Some loan programs (see item No. 5) enable you to buy a home with zero down or 3.5% down. Sometimes that's a good idea, but homeowners occasionally have regrets.

In a survey commissioned by NerdWallet, one in nine (11%) homeowners under age 35 agreed with the statement “I should have waited until I had a bigger down payment.” It was one of the most common regrets that millennial homeowners had.

“The key is making sure your down payment secures an affordable monthly house payment.”

How to avoid this mistake: Figuring out how much to save is a judgment call. A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments.

The downside of taking the time to save more money is that home prices and mortgage rates have been rising, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase.

The key is making sure your down payment helps you secure a payment you’re comfortable making each month.

» MORE:  Down payment strategies for first-time home buyers

In another survey commissioned by NerdWallet, millennial homeowners described how long it took to save for a down payment. Among millennials who had bought a home in the previous five years, it took an average of 3.75 years to save enough to buy. So if it's taking you three or four years to save up, you have plenty of company.

» MORE: How to figure out the right down payment amount for you

5. Not looking for first-time home buyer programs

As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs.

But don’t make the error of assuming that you have to delay homeownership while saving for a huge down payment.

There are plenty of low-down-payment loan programs out there, including state programs that offer down payment assistance and competitive mortgage rates for first-time home buyers.

Yes, 11% of millennial homeowners say they regret not making a bigger down payment. But the vast majority don't express such a regret.

» MORE: Learn about first-time home buyer resources in your state

How to avoid this mistake: Ask a mortgage lender about your first-time home buyer options and look for programs in your state. You might qualify for a U.S.

Department of Agriculture loan or one guaranteed by the Department of Veterans Affairs that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.

5%, and some conventional loan programs allow down payments as low as 3%.

» MORE: Find a first-time home buyer program that’s right for you

6. Ignoring VA, USDA and FHA loan programs

A lot of first-time home buyers want to or need to make small down payments. But they don't always know the details of government programs that make it easy to buy a home with zero or little down.

How to avoid this mistake: Learn about the following loan programs:

  • VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. They're for people who have served in the military. VA loans' claim to fame is that they allow qualified home buyers to put zero percent down and get 100% financing. Borrowers pay a funding fee in lieu of mortgage insurance.» MORE: The basics of VA loans
  • USDA loans can be used to buy homes in areas that are designated rural by the U.S. Department of Agriculture. Qualified borrowers can put zero percent down and get 100% financing. You pay a guarantee fee and an annual fee in lieu of mortgage insurance.» MORE: What you need to know about USDA loans
  • FHA loans allow for down payments as small as 3.5%. What's more, the Federal Housing Administration can be forgiving of imperfect credit. When you get an FHA loan, you pay mortgage insurance for the life of the mortgage, even after you have more than 20% equity.» MORE: All about FHA loans

7. Not knowing whether to pay discount points

Mortgage discount points are fees you pay upfront to reduce your mortgage interest rate. Interest rate savings can add up to a lot of money over the life of a mortgage, and discount points are one way to gain those rate savings if you’re in the right position to purchase them.

How to avoid this mistake: If making a minimal down payment is an accomplishment, the choice is simple: Don't buy discount points.

If you have enough cash on hand, the value of buying points depends on whether you plan to live in the home longer than the “break-even period.

” That's the time it takes for the upfront cost to be exceeded by the monthly savings you get from a lower interest rate.

» MORE: Calculate whether you should pay for discount points

8. Emptying your savings

If you buy a previously owned home, it almost inevitably will need an unexpected repair not long after. Maybe you’ll need to replace a water heater or pay a homeowner's insurance deductible after bad weather.

“That’s a growing pain for the first-time homeowner, when stuff breaks,” says John Pataky, executive vice president of the consumer division of EverBank. “They find themselves in a hole quickly,” if they don't have enough saved for emergencies.

» MORE: How to save for a down payment

How to avoid this mistake: Save enough money to make a down payment, pay for closing costs and moving expenses, and take care of repairs that may come up. Lenders will give you estimates of closing costs, and you can call around to get estimates of moving expenses.

» MORE: Calculate how long it will take you to save for a down payment

9. Applying for credit before the sale is final

One day, you apply for a mortgage. A few weeks later, you close, or finalize, the loan and get the keys to the house. The period between is critical: You want to leave your credit alone as much as possible. It’s a mistake to get a new credit card, buy furniture or appliances on credit, or take out an auto loan before the mortgage closes.

“Wait until after closing to open new credit accounts or charge big expenses to your credit cards.”

Here’s why: The lender’s mortgage decision is your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments.

Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio.

Neither of those is good from the mortgage lender’s perspective.

» MORE: Why debt-to-income ratio matters

Within about a week of the closing, the lender will check your credit one last time. If your credit score has fallen, or if your debt-to-income ratio has gone up, the lender might change the interest rate or fees on the mortgage. It could cause a delay in your closing, or even result in a canceled mortgage.

How to avoid this mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. It’s OK to have all those things picked out ahead of time; just don’t buy them on credit until after you have the keys in hand.

» MORE: What not to do during mortgage approval

10. Shopping for a house before a mortgage

It’s more fun to look at homes than it is to talk about your finances with a lender.

So that’s what a lot of first-time home buyers do: They visit properties before finding out how much they are able to borrow.

Then, they are disappointed when they discover they were looking in the wrong price range (either too high or too low) or when they find the right home, but aren’t able to make a serious offer.

» MORE: Calculate the estimated value of a home you're interested in

How to avoid this mistake: Talk to a mortgage professional about getting pre-qualified or even preapproved for a home loan before you start to seriously shop for a place. The pre-qualification or preapproval process involves a review of your income and expenses, and it can make your bid more competitive because you’ll be able to show sellers that you can back up your offer.

Neal Khoorchand, broker-owner of Century 21 Professional Realty in the South Ozone Park neighborhood of Queens, New York, pre-qualifies his clients before showing them properties.

“If you’re qualified for a one-family house for $500,000, we’re not going to show you a one-family for $600,000 — it would be a waste of time,” he says.

» MORE: What a preapproval is and why it matters

11. Underestimating the costs of homeownership

After you buy a home, the monthly bills keep stacking up. This can come as a surprise if you’re not ready.

“It’s not just your mortgage payment,” says Seth Feinman, vice president of Silver Fin Capital, a mortgage brokerage in Great Neck, New York. “You’re going to have the oil bill, the gas bill, you’re going to have a cable bill, you’re going to have all these things that the bank doesn’t care about when qualifying you for a mortgage.”

Renters often pay these kinds of bills, too. But a new home could have higher costs — and it might come with entirely new bills, such as homeowner association fees.

How to avoid this mistake: Work with a real estate agent who can tell you how much the neighborhood’s property taxes and insurance typically cost. Ask to see the seller’s utility bills for the last 12 months the home was occupied so you have an idea how much they will cost after you move in.

» MORE: Calculate the real costs of owning a home

12. Miscalculating repair and renovation costs

First-time home buyers are frequently surprised by high repair and renovation costs. Buyers can make two mistakes: First, they get a repair estimate from just one contractor, and the estimate is unrealistically low. Second, their perspective is distorted by reality TV shows that make renovations look faster, cheaper and easier than they are in the real world.

How to avoid this mistake: Assume that all repair estimates are low. James Ramos, owner of Re/Max Bay to Bay, a real estate brokerage in Tampa, Florida, recommends doubling the estimates to get a more realistic view of costs.

Seek more than one estimate for expensive repairs, such as roof replacements. A good real estate agent should be able to give you referrals to contractors who can give you estimates. But you also should seek independent referrals from friends, family and co-workers so you can compare those estimates against ones you receive from contractors your agent refers.

» MORE: Why you should budget for repairs even before you buy

Источник: https://www.nerdwallet.com/article/mortgages/first-time-home-buyer-mistakes-that-are-easy-to-avoid

Why Buying a Larger Home Was a Huge Financial Mistake

Buying a home? This mortgage mistake can cost you

Taking on a new financial obligation before you're financially ready can cost you far more than it's worth. 

“Learn from the mistakes of others. You can't live long enough to make them all yourself.” This quote has been attributed to everyone from Benjamin Franklin, to Eleanor Roosevelt, to Oliver Wendell Holmes. And though I'm not sure who deserves credit, it's one of my favorites.

As someone who tends to learn by making mistakes, I've made some doozies. The biggest, dumbest thing I have ever done financially is to talk my husband into selling our small starter home to purchase a big, shiny new house. We were not ready. Life before that house was simple but relatively stress-free. The years that followed were full of regret and sleepless nights.

Here are some of the reasons we shouldn't have bought that house — ones that you can learn from:

1. We didn't prioritize an emergency fund

We depleted our savings to get into the house.

Although I'd to blame it on the fact that it was the 1980s and the entire nation was caught up in a “go big or go home” mentality, we were the ones who decided to throw caution to the wind. It came back and bit us in the budget.

 

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The tuition assistance we depended on for my husband to finish graduate school dried up, which meant we weren't bringing in enough money. Since nearly everything we were earning went into the new house, we had to rob Peter to pay Paul to finish paying for school. An emergency fund would have allowed us to pay for my husband's last few classes without going further into debt. 

An emergency fund gets us through when money we'd counted on dries up, someone gets sick, has been laid off, or our home requires a sudden, unexpected repair. 

2. We were carrying credit card debt

Going into a new home with credit card debt is a recipe for disaster for two reasons: It's stressful to juggle mortgage payments alongside high-interest debt, and applying for a mortgage while carrying that debt can cost you big.

One of the most important things you should do before you buy a house is to get your credit score as high as possible. Carrying credit card debt has a big impact on the second biggest factor that's used to calculate your score: credit utilization.

This is the ratio of your outstanding balances against your available credit. If you have a credit card with an available credit limit of $1,000 and owe $500, your ratio would be 50%.

A high credit utilization worries lenders as it suggests you might be overly reliant on credit.

Less credit card debt can mean a higher credit score and lower debt-to-income ratio. That, in turn, should snag you a better mortgage rate, which could save you tens of thousands of dollars. 

Consider this: At the time of writing, a person with fair credit might be able to get a 30-year mortgage for $300,000 with an APR of around 4%. Someone with good credit might qualify for the same mortgage with a 3% APR.

The person with fair credit would pay about $1,430 a month and $215,600 in interest, while the person with good credit would pay $1,265 a month and $155,330 in interest.

That's a savings of $60,270 over the course of the loan, just for having better credit.

3. We weren't putting down roots

We were only in this home for three years. What that meant for us financially was that we spent thousands of dollars on real estate agent fees and closing costs. Although the closing company cut us a check, it was not enough to cover the equity we brought over from our first home, moving costs, or any of the improvements we made to the property. We were simply not there long enough. 

We learned our lesson. My husband's career meant we moved approximately once a year between 2006 and 2016. We were wise enough to rent, bank our money, and wait until we expected to be settled to purchase another home.

No, we didn't build equity during that time, but we also didn't lose money by owning what should be a long-term investment for a short period of time. most investments, you don't want to sell too soon.

A good rule of thumb is to be confident that you will be in your home for five to 10 years so that you can build equity. 

4. We were overly optimistic

When you take on a mortgage, it's easy to believe that you can trim all the fat your budget and commit to a higher monthly payment so you can afford a more expensive property.

But — in addition to having an emergency fund firmly in place — you need to make sure your mortgage is low enough to allow for extras.

No matter how much you that koi pond in the backyard of a home, you will eventually resent having to give up hobbies, trips, and fun extras. 

What we fell in love with was not a koi pond, but turrets that gave the house a Victorian vibe, a cool interior catwalk, and a huge master bedroom. We now refer to such flourishes as “jazz hands,” but back then we were willing to convince ourselves that we could afford it.

Our mortgage went from $419 per month to just over $1,200, which we decided we could handle. What we didn't account for was a water bill that would be well over $100 each month, property taxes that added hundreds of dollars to our monthly mortgage payment, and a sudden desire to have all the cool toys our new neighbors had.

Oh, and there were those stinking tuition bills to cover. 

5. We didn't recognize how much the “boring” stuff pinches

Because our new house was in a more exclusive area, the cost of “irregular expenses,” insurance premiums, changed. I'm not sure why we didn't check on details taxes, insurance, and utilities when we purchased this home, but you don't have to make the same mistake. 

Don't buy a home until you factor in all the expenses associated with it. Ask how much taxes are, call your insurance agent to find out how much insurance premiums will run.

If the house is not new, ask to see a copy of utility bills for the previous three months. Find out how much homeowner association dues are and which services they include.

In short, ask so many questions that you irritate someone. 

penicillin and Post-it Notes — both invented by accident — mistakes are not always a bad thing. But you'd sleep better at night if you can skip the five home-buying mistakes above.

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Источник: https://www.fool.com/the-ascent/mortgages/articles/why-buying-larger-home-was-huge-financial-mistake/

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