A house isn't a frequent purchase. The average person purchases only three homes in their lifetime. Mistakes will occur, but you can avoid some of the more common ones.
Some of the biggest mistakes are made even before the home buying process begins. When you're thinking about buying a home, avoid these missteps before you start.
2. Check your credit score. Your credit score is a three digit number that is used to determine if the people loaning you money think you will pay it back. Your score is impacted by your amount of debt, how often your bills are paid on time, how long you've been using credit, and how many credit cards you own. Because it can take some time to save for a down payment checking your score early in the home buying process gives you the opportunity to improve your score before you officially apply for a mortgage.
3. Find the right realtor. Everyone has a real estate license but that doesn't mean that they know how to navigate a real estate transaction. There are lots of moving parts. A realtors job isn't just to open up a door and show you a nice house. There are timelines, contracts, and inspections that need to be managed properly, otherwise it can cost you lots of money.
Find a realtor who you feel comfortable working with. You can find realtors through family and friend recommendations, at open houses, or by looking at signs in the neighborhood where you'd ideally like to purchase a home.
Ask lots of questions, and make sure you are comfortable working with the person.
Some mistakes are simply a matter of not understanding the process. Real estate has its own terminology and language, and sometimes the abundance of information can be confusing.
4. What is PMI? Private Mortgage Insurance (PMI) may be required if your down payment is less than 20% of your purchase price. It protects the entity lending money if you're unable to pay your mortgage. PMI can range from .3 - 2.5% of the loan amount each year.
The downside of PMI is paying several thousand dollars in additional fees annually. The benefit is that you can purchase a home with a lower down payment, which means becoming a home owner sooner and building equity. This can be beneficial in areas with high and consistent home values.
Loans with PMI:
5. What are points? Points, or mortgage discount points, also known as a buy down are one-time fees you can pay to the company providing the loan in exchange for a lower interest rate.
6. What is escrow? Many people have heard of escrow. And many people don't really know what that means. Escrow is a legal contract held by a third party. That third party temporarily holds an amount of money until the other two parties (you and whomever is owed the money) meet certain conditions. For instance, when money is put into escrow for a purchase on a property (known as an earnest money deposit) that money is held temporarily by an escrow company until the transaction has been finalized.
Read more about earnest money deposit:
You've saved your down payment, you're pre-approved for a loan, and you're on the hunt for the right house. Many first time buyers think their dream home will be perfect when they walk through the door, but in reality it may require a little bit of work to fit that picture.
7. Don't judge a book by its cover. Don't allow details like paint color, wallpaper, or even furniture impact whether or not to purchase. These are all simple and inexpensive things to change. It can be a challenge for even the most seasoned home buyer to overlook hot pink walls or furniture that's falling apart, but if you can see past those details you might find an ideal match.
8. Be flexible with location. If your preferred neighborhood has nothing available within your price range, be open-minded about nearby communities or a smaller house in your ideal area.
If you are close-minded and think that eventually a home in your price range will pop up in a specific neighborhood where home prices are out of your range, you may never end up owning a home. Values are going up. We are not going to see a housing crisis like we did in 2008 for a very very long time.
9. Pay attention to the home inspection. The inspection lets you know what issues or necessary repairs exist. You may not want to purchase a home that requires expansive repairs. On the flip side a lengthy inspection may only uncover minor, easily fixed, issues. Read the inspection carefully before assuming whether or not to buy the home.
Many mistakes stem from not having a financial plan in place before you begin. Buying a home is a large and long financial commitment; planning ahead will help avoid these issues.
10. Miscalculating costs for repairs. After the home inspection, request multiple quotes for any repairs required. Obtaining only one quote could hurt you if that business miscalculates the actual costs, or misses something that another company discovers.
11. Not considering all costs of home ownership. Ideally you should budget 25% of your income for the mortgage. Any more than that and you risk not having extra finances to pay for emergencies that will arise, like a hole in the roof or an earthquake. Even when your issue is covered by insurance, you still will need to pay a deductible - a minimum amount out-of-pocket.
12. Not having enough of a down payment. Saving more money at the beginning of the home buying process means paying less money in the future. The more money you put down on a house, the better rate you can get from a lender and the less you will have to pay in interest. It also increases the odds of avoiding PMI and means you will pay off your home more quickly or can have a lower monthly payment.
Some mistakes are things that some home buyers, especially those purchasing for the first time, don't even know about. Certain resources are only available for your first purchase so now is the time to learn about them.
13. Lower mortgage options. For a better rate, explore a government loan depending upon your circumstance as a first time buyer. The VA loan is available for veterans, the FHA loan is an option for low-income buyers, or the USDA loan is available in rural areas for those who qualify. If you haven't owned and occupied your own home for three years, you're considered a first time home buyer.
14. First time homebuyer resources. CalHFA has many additional resources for first time home buyers including down payment assistance programs and a teacher and employee assistance program. They also provide access to the government loans listed above.
15. Negotiable items. Price, issues uncovered by the home inspection, and the closing costs are all negotiable when buying a home. You can request that the seller address certain issues from the inspection, pay for a closing costs or lower their price based upon the inspection. The seller may decline, but it's always worth asking.
Buying a home can be overwhelming and there are plenty of chances to make mistakes. But do your research, take your time and you'll be in the best position possible. And remember, the biggest mistake is not looking into home ownership at all.
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