These are exciting times. You've finally outgrown apartment life or living with your parents or sharing a place with waaaaayyyyy too many roommates, and your're ready to take the leap to home ownership. Now it's time to prepare. As you embark on this journey, beware of six important don'ts that could potentially derail your purchase.
Don't think it's too early to get prequalified
So, you're just going to go out "looking" at houses, you say? The time when you just expect to drive around a little and maybe visit an open house or two is obviously the time when you're going to fall in love with a house and want to make a move on it right away. If you're not already pre-qualified with a lender, you may not have a chance at it. Competition is fierce across the country thanks to low inventory, and well-maintained, move-in ready homes do not sit if they're priced right. Talk to a lender now to make sure you can qualify - and learn your max budget - even if you just think you're casually looking (because that can change in a hurry!).
Don't wait to the last minute to check credit
As a continuation of the casually looking conversation...you want to check your credit the second you start thinking about buying a home. You never know what's going to be on there. Even if you've never missed a payment and have always done a good job of managing your outstanding debt, there could be errors on your report that you're unaware of or even something from many years ago that you didn't realize had been reported to a credit agency. Those little boo-boos, accurate or not, could be hurting your score, and a low score could keep you from getting a mortgage at all. Give yourself time to correct errors or fix blemishes; every tick upward can help you get a better rate and make your home more affordable.c
Don't forget about PMI when calculating your monthly expenses
The idea of putting as little down as possible on your new home is attractive, especially if you're not a natural saver. Today, that can mean just three percent of your purchase price, depending on the loan. For FHA loans, it's three and one-half percent. The problem with making the minimum down payment is that you then have to pay Private Mortgage Insurance (PMI).
"PMI is a fee you pay on your mortgage until you owe 80 percent or less of what your home is worth. It's one reason why so many experts advise home buyers make a 20 percent down payment; if you do, you avoid the evils of paying PMI." "PMI can cost between 0.3 percent and 1.15 percent of your loan annually. Depending on how much you borrow, that can mean thousands of dollars in extra costs until you can cancel your PMI."
Don't ignore the closing costs
Many of us micro-focus on the down payment when getting ready to buy our first home, but there is another important expense related to the purchase: The closing costs. Closing costs encompass a wide variety of fees, some or all of which may apply to you depending on where and what you're buying. They can include everything from the application fee and appraisal to the escrow fee to the home and pest inspection to the recording fees. You're looking at between two and five percent of your purchase price for closing fees, which can definitely add up. Many first-time buyers fail to factor this in when getting ready to purchase, and you don't want something that could amount to a few thousand dollars or more to come as an 11th-hour surprise.
Don't forget to factor in all the monthly expenses
New-home communities often quote a monthly payment that looks quite affordable and that can entice buyers who don't look more closely. That's because the payment is based on principal and interest only. (Typically, you'll see a star next to the payment that tells you there's a disclaimer at the bottom of the page). If you take a look at the small print, you'll see that there are also taxes and insurance to factor in. In some cases, there is also a homeowner's association fee. That monthly payment may not be looking so good anymore.
If you're buying your first home and coming from an apartment or other rental property, you may not have worked things like a gardener into your monthly budget. You'll also want to consider that if you're going up in square footage, there could be an increase in your utilities, and you may be taking on payments for things like water and trash that were covered by your rental. It's best to have a true idea of what your monthly expenses are going to look like when buying your first home so you don't end up in over your head.
Don't think you can go it alone
Can you buy a home without an agent? Sure. Is it a good idea? Not usually. It could be that you are looking to buy a home that is for sale by owner. In the industry, we call these types of sellers "unrepresented". Beware if you are trying to buy a home directly from an unrepresented seller. Odds are the seller won't know what she is doing or she might be taking advantage of you; either way, it could be problematic.
Unless you are a real estate attorney or are otherwise connected to the industry and aware of the laws, contract issues, etc., it's best for you to have representation, regardless of what type of home you are buying.