Mistakes to Avoid When Buying a New Home
There are many common first time home buyer mistakes, and it is not hard to see why. Purchasing a home is a complex process that involves many different elements, from financing to inspections. Unfortunately, making mistakes anywhere in the process can have long-term effects on your finances. If you make big-enough mistakes, you could even face serious consequences like defaulting on your mortgage or acquiring additional debt.
If you have never experienced applying for a multi-family or single-family mortgage or choosing a property before, you will likely be overwhelmed. However, there are actions you can take to prepare yourself. This includes learning what you need to buy a house and accessing the various resources available to help you along the way. Mortgage calculating tools and down payment grants are just a few resources that can help you secure an affordable home. Make sure to utilize these as well as the following home buying tips to get on the right track to becoming a homeowner.
Not Using a Mortgage Calculator to Create a Budget
“How much home can I afford?” is the most important question that you need to ask yourself during the home-buying process. Aside from the cost of the home itself, there are many other factors that go into purchasing a property. In order to create a budget, you need to consider all of the costs that are involved in the process, including:
- Mortgage insurance and homeowners insurance.
- Inspection fees.
- Closing costs.
- Association fees
- Property and real estate taxes.
- Maintenance and repair costs.
Fortunately, you can use a mortgage affordability calculator to calculate many of these expenses and estimate your monthly housing costs. Learning how to use a mortgage calculator enables you to compare the cost of different homes and create a realistic budget for yourself. That way, you can narrow down your choices to only the most affordable properties. It is important to create a budget you can stick to in order to avoid issues when making your mortgage payments in the future.
Download our guide to learn more about the costs associated with buying a home.
Waiting to Apply for Mortgage Financing
Knowing when to apply for a mortgage is another important step when it comes to buying a home. In fact, it can affect your ability to buy your dream house if you apply too late. With this in mind, it is a good idea to submit your application before you even have a particular property in mind. This approach is called prequalification. Mortgage lenders allow you to prequalify for a home loan based on your current finances. With this information, lenders estimate the maximum mortgage loan you may be able to receive. You can then begin to shop around for homes within that price range. Be aware that a prequalification is just an estimate, making it different from a preapproval, which gives you a more exact amount for which you are eligible.
Before you prequalify for mortgage loans, it is also important to shop around for the right lender. Each mortgage lender approaches the application review process in different ways. Some are more strict about applicant qualifications that others, which can affect your eligibility. Likewise, each lender sets its own interest rates and fees. In order to get the best mortgage rate possible, examine the annual percentage rate (APR) of multiple lenders before choosing where to apply.
Only Considering Conventional Mortgage Loans
Conventional loans are offered by most mortgage lenders. However, many of these loans have strict qualifications attached, which makes getting a mortgage difficult for those with less-than-ideal credit. For this reason, entities such as the Federal Housing Association (FHA) offer government-backed loans to help applicants with lower credit scores. An FHA loan allows applicants with credit scores of at least 580 receive affordable rates with a small down payment. Other government-backed loans are also available through entities such as:
- Fannie Mae
- Freddie Mac
- Department of Veterans Affairs (VA)
- The U.S. Department of Agriculture (USDA)
In order to qualify for loans like these, you will need to meet additional requirements. For example, FHA guidelines state that only credit scores of 580 or above qualify for the minimum down payment option. Scores between 500 and 579 are required to pay a higher down payment in order to receive a loan. Alternately, the VA has no minimum credit requirement but only accepts service members, veterans and their families as applicants. If you are worried that you will not qualify for a conventional loan, consider one of these options to get approved and even save on your down payment.
For more information about government-backed loans, download our comprehensive guide.
Forgetting About Down Payment Assistance
Whether you apply for a conventional loan or a government-backed loan, there is often a minimum down payment required. Consider this your deposit on the property you want to buy. Depending on the type of loan you receive or the type of property you wish to buy, your minimum down payment can be quite high. Fortunately, many first time home buyer federal grants are available to help you reach this minimum. These are offered at the state and local level, so grant amounts may differ. In most cases, the funds can be applied toward the closing costs and other fees, as well as the down payment.
To use these grants for a minimum down payment for a house, you must meet certain requirements. As previously stated, many down payment grant programs focus on first-time homebuyers. The only requirement to qualify as a first-time homebuyer is that you have not purchased a home within a certain number of years. However, there are grants available for repeat buyers as well. Make sure to research the programs near you to learn about specific program qualifications.
Choosing to Waive the Home Inspection Option
While a property inspection adds additional costs to your budget, it is an important part of the home-buying process. In fact, many contracts include a clause regarding a buyer’s right to an inspection. Failure to have a property inspected before you buy it can lead to even more expenses if you are not careful. Certain issues are not easily visible to the untrained eye. To avoid paying for costly repairs after signing the contract, make sure to hire a trustworthy inspectors. When determining what to look for when buying a house, make sure the inspector examines the property for the following:
- Termites and other infestations
- Roof or structural damage
- Leaks in plumbing or appliances
What is Fannie Mae?
The Federal National Mortgage Association (Fannie Mae) provides affordable housing finance options for homebuyers and renters. Fannie Mae does not provide original mortgages. Rather, the organization purchases existing mortgages and guarantees them with government sponsorship. Fannie Mae mortgages have a fixed rate and can have a lifespan as long as 30 years.
Who is eligible for Fannie Mae?
Fannie Mae guarantees multi-family and single-family mortgages and loans. To qualify for either type of loan, an applicant must have an income lower than the local average, and the property he or she wants to buy must be worth less than the federal maximum. Further, applicants must have a credit score above 620. However, the minimum required credit score may change depending on how many properties the applicant plans to purchase.