As a home buyer, especially first time home buyer, you have pressure to get things right on finding your dream home. Shopping for a home is exciting, exhausting and a little bit scary. In the end, your goal is to buy a home you love at a price you can afford. Navigating the financial responsibilities of buying a home can be challenging. Most newer home buyers are unaware of all the costs associated with buying and owning a home – but are quickly made aware of them, if they are working with a good real estate agent. But even with the help of a real estate agent, it can be easy to make serious mistakes in terms of your finances. By educating yourself before you even start looking at homes, you put yourself in a far better position not to make mistakes and be prepared for future.
The following are five tips to help ensure that you don’t make these financial mistakes when buying your home.
1. Don’t focus on distressed properties because you think you’ll find a good deal
Since the housing market crashed, a lot of home buyers will explore distressed properties, such as foreclosures or short sales, in the search of a bargain. If you’re looking to invest your money, then a distressed property can be a great deal. But you need to have lot of time on your hands.
If you’re actually looking for a home to move in immediately, then you don’t want to waste your time looking at distressed properties. Deals for distressed properties not only take months to close, but the amount of money you may have to put into renovations may be not worth it. Spending all of your time looking at distressed properties could also result in missing out on well-priced homes that may have suited all of your needs. As a home buyer, keep in mind that you are looking for a new home first and foremost — bargains are nice, but you shouldn’t be focused on finding one. Focus on finding what you love and needs.
2. Maxing out your loan that your lender is offering
Just because you are approved for a mortgage doesn’t mean you have to borrow the full amount that the lender is offering. Lenders qualify buyers based on their incomes and debt-to-income ratios without considering how much the borrowers spend on items such as transportation, savings, food and other necessities.
What is Debt to Income Ratio (DTI)?
A general rule of thumb is to borrow around 20 percent less than what the lender is offering. If the lender has approved a $350,000 mortgage, you should consider only looking for homes priced at $280,000 or less. This will help to protect you financially now and in future. The amount offered by the lender is typically the most that they are comfortable lending to you in terms of what they think you can pay back on a monthly basis. Keep in mind that what lender says you can afford and what you know you can afford or are comfortable with paying are not necessarily the same.
3. Choosing the wrong type of loan
While today the most popular type of home loan is still the 30-year fixed-rate mortgage, this is not the only type of home loan that is available to buyers. There may be other options that work better for you depending on your situation. The best way to find the right loan for you is to talk to your lender and explain all of your concerns and your home-buying goals.
4. Don’t use up all of your cash in order to buy the house
Make sure that you prepare for the many costs associated with buying a home, from the down payment to inspection fees, appraisal fees and more. Not to mention all the other costs that you need to prepare yourself down the road, including your mortgage payments, homeowners insurance, HOA fees, property taxes and so on. When saving up money, keep all of these costs in mind. You don’t want to empty out your savings account by your very first day as a homeowner, as this can end up putting you in a very dire financial situation.