Are you looking into buying your first home? Are you excited to create some equity after years of renting? Getting your first mortgage can be your most significant financial leap. Over our first 80+ years as a credit union, we have seen many success stories. Here are five common mistakes that we would like to see all first time home buyers avoid.
Looking For A Home Before Getting Pre-approved
Being on the hunt for a home is a challenging experience, to say the least. Challenges arrive at every stage, especially when you first decide that you are going to attempt to purchase a home. The mistake that many first time home buyers make is that they immediately start looking for homes, whether it be on Zillow, Realtor.com, in their local neighborhood or contacting a Realtor. The hunt is a fun experience, but it can be a detrimental one. Chances are, you are overestimating how much house you can afford and developing a taste for homes that are out of your price range. Our recommendation for all first time home buyers is to start the pre-approval process. By doing this, you are limiting the possibility of getting your sights set too high.
Purchasing Your Pre-Approved Amount
When you are Pre-Approved for a certain amount, that is how much you can afford based upon your debt to income ratio. Often, utilities and other day to day expenses are not factored in. By doing this, you are risking your ability to increase your savings, retirement, or emergency fund. Saving for these three isn't crucial in purchasing your first home, but they are essential keys to the rest of your life, so before you buy a house that forces you to stop saving, factor those in as a necessity.
Draining Your Savings For A Down Payment
The down payment on your first home can be very intimidating. Your savings account, full of all your hard work and effort over the years, is one of a few sources you can use for a downpayment. Many first time home buyers are tempted to use their entire savings account attempting to pay less in interest and per month on their mortgage. Imagine losing your job a few months after buying your first house and draining your savings account. Without having that cushion in place, you can be forced into things that can be detrimental to your financial success, like foreclosure and bankruptcy. A standard tip is to have at least three months of expenses as a safety valve if an issue arises.
Not Planning For Closing Costs
Many first time home buyers are guilty of forgetting about the closing costs in this process. These fees include your appraisal, origination fee, property taxes, and many more. On occasion, these can add up to be a large amount of your down payment. The key is researching the closing costs that you are expecting and factoring them into your down payment. Doing this can help you manage the stress on the closing day by not getting hit with a significant unexpected expense.
Underestimating the Costs That Come Along With Owning a Home
Research was crucial in your early life, and it is even more critical as you are making significant financial moves. How much will your utilities be? How much will my homeowner's insurance policy cost? Will I need more furniture or new appliances? These thoughts are often too late and end up costing you more money, or you must take out another loan to pay them. First-time home buyers forget these because they are accustomed to renting where the landlord or the maintenance crew took care of it. Our advice is to fit all the costs that come along with owning a home into your monthly budget, which was covered last month in our P1FCU Blog.
To all of you who would like to buy your first home, we are here to help you. We understand that it can be a very challenging, stressful, and impactful decision. With these five common missteps, we hope that we can start you in the right direction.
This is for educational purposes only and not financial advice.