5 Mistakes First Time Buyers Can Avoid
Buying your first home should be exciting but not overwhelming. Buying a first home is a big financial responsibility that you want to accomplish in a way that you fall in love with your new home and remain within your financial comfort zone. You can have both. Here are five possible mistakes to avoid so that your first home is a blessing and not a burden.
1. Not determining how much house you can afford. A good goal is buying the house that you want but can also comfortably afford. A rule of thumb is spending no more than 28% of their gross monthly income on housing expenses and no more than 36% on total debt. Debt includes things like student loans, car expenses, and credit card payments. Your total monthly mortgage payment includes property taxes and homeowner's insurance. These are numbers that most lenders require.
There are tools to help you understand where your home affordability finances stand today and what you may need to change to improve them. You can start on your own with one of the many online home affordability calculators. The numbers that you need come from everyone that will be applying for the loan (usually you or you and your spouse). Your income is the monthly amount that you bring in before taxes. Let’s say you bring home $2,600 a month and your spouse brings home $2,400 a month. Your total monthly take-home pay would be $5,000.
These are only income and debt ballpark numbers. Since this is your first home purchase, it’s a good idea to work with a professional loan officer after you do a little preliminary work. The 28% of your gross monthly income and 36% total debt are conservative numbers but these work well if you want to comfortably afford your home. One reason to work with loan officers is that they can help you understand how much you might stretch those numbers and still qualify for a loan if that is your decision. Loan officers can also help determine other income sources that will be considered such as bonuses and commissions. They will also tell you what documentation is needed to verify your income.
2. Not correcting credit report errors. Your credit score both determines if you will qualify for a loan and how much your interest rate will be. The interest charge is the biggest part of your mortgage payment in the early years. You might think that reducing your debt is the only way to improve your credit score but reliable estimates are that one out of four people has errors on their credit reports that can be corrected to improve their credit score. You want to obtain copies of your credit report from the three major credit bureaus. If you find mistakes, you can dispute them online through the bureau’s website or in writing by postal mail.
Once you dispute an item, the credit bureau has 30 to 45 days to investigate. If it determines the information is an error or they can’t verify it, the bureau has to remove the information from your report. The process can take two or three months to complete, which is why you should do this sooner rather than later.
3. Not interviewing several real estate agents. Almost every first-time homebuyer begins their search online but it shouldn’t end there. As soon as you think you are able to afford the home that you want, you need to interview several real estate agents to find an expert “buyer’s agent” to assist you in finding and securing your perfect home. The buyer agent will be your best friend throughout the entire process. He or she will be another asset to help you understand how much home you can afford as well as provide many other services such as explaining the particular markets (neighborhoods) and the price range meeting your desires and finances.
Key attributes you want to find in your agent is one that understands your financial values and will respect your budget. You also want an agent that you communicate with easily, one with a strong history of completing sales, and who has an extensive support network in your local market.
4. Not investigating first-time homebuyer programs. A common mistake made by many first time buyers is that there are multiple programs to help first-time buyers that often range from a 0% down payment to 3.5%. There may be state programs available and there are certain federal programs available. Both your real estate agent and a loan officer can explain what is available and what the qualification requirements are. A few of the most popular programs are:
· VA loans as low as 0%.
· FHA loans between 3% and 3.5%.
· USDA loans at 0% in designated rural areas.
· In Georgia, where I live, the have the GA Dream
You also want to learn the differences between the loan types.
5. Getting just one lender’s rate quote. This is about the down payment, closing costs, and the interest rate that you will charge. Remember that the loan interest will be the largest part of your monthly payment in the early years. Small differences in the interest rate can save you thousands of dollars each year. Get quotes from three different lenders. You do not have to have your credit pulled to get a quote.
The Consumer Financial Protection Bureau says that almost half of borrowers don’t shop for a loan. Besides the interest rate, there are closing costs and fees that different lenders charge. Your closing costs can be as high as 3.5% to 5% of the loan costs. Different lenders have different cost structures. All of this can make a big difference in how much of your savings will be applied towards the down payment instead of towards loan costs.
These are five potential pitfalls that you want to avoid so that your first home purchase is an exciting adventure instead of the frustration of unwanted surprises. Total Atlanta Group is pleased to help you learn more about available programs and home buying opportunities in your area that best apply to your situation.
If you need more information or have questions, please contact us for a note. You can also reach us by calling at (678) 570-8123. We'll be glad to help you!