Owning a home is an accomplishment that 65% of Americans aspire to. There are many steps in the home-buying process, and for most people, a home is the most valuable asset that they will ever purchase and an expensive investment. If you are looking to purchase your first home in the Dallas, Austin, or Houston market, keep reading to discover seven common mistakes that you should avoid.
The 7 Most Common Mistakes Made by First-Time Home Buyers in the Dallas, Austin, and Houston Areas
1. Spending All of Their Savings
One of the most common mistakes that first-time home buyers make is spending all of their savings. It can take years to save up for the down payment and closing costs on a home, and it can be tempting to buy a house as soon as you have enough cash saved up to cover the costs of the mortgage.
However, it is a very good idea to have a cushion of cash left over once your home-buying process is complete. You never know when you will need some extra money to replace the transmission in your truck or have a new water heater installed. If you don’t have an ample amount of savings after you purchase your first home, you may need to take on more debt to finance projects, increasing your monthly expenses temporarily.
2. Not Saving Up Enough Money
Another common mistake made by people new to the home-buying process is not saving up enough money. Closing costs, like mortgage insurance, property taxes, and title fees, can be rolled into the mortgage. However, this will cost you more money in the long run. Remember, it’s a good idea to have an ample cash cushion after making your down payment and using cash to pay for your closing costs.
If you’re wondering how much money you should have saved up before you close on a home, you’re not alone. It used to be considered the golden rule of buying a home to put down 20%. One of the primary reasons for this was to avoid paying private mortgage insurance (PMI). Today, there are many more types of loans; in some cases, you may only need 3.5 to 10% of the mortgage value to cover the down payment on the home.
An Additional Word on Savings
The amount you should save up for your down payment depends on the type of loan you are taking out. Besides that, you should plan another 3 to 6% of the selling price of the home to cover closing costs. Depending on the state of the market you’re trying to buy in, there is a small chance that you can convince the seller to cover some or all of the closing costs. However, ideally, you should be prepared to cover all applicable closing costs with cash, such as:
- Homeowners insurance
- Property taxes
- Mortgage insurance
- Loan origination fees
- Application fees
- Appraisal fees
Furthermore, it is advisable to have three to 12 months of mortgage payments or expenses saved up. If you have a high risk tolerance, confidence in the stability of your job and your ability to find a similar-paying job, and multiple revenue streams, you may only need a few months’ worth of mortgage payments saved up. On the other hand, if you think it will be hard for you to replace your income in the event of a job loss, you may want a year’s worth of expenses saved.
3. Neglecting First-Time Home Buyer Programs
Another mistake you should avoid if you have never purchased a home before is not taking advantage of programs and grants designed to help you afford your first home. You may qualify for a city, state, or national program or grant designed to help you afford your first home. Depending on your income, you may even qualify to purchase a home with as little as no money down.
4. Ignoring Government-Backed Loans
Ignoring government-backed loans is another mistake commonly made by people who are purchasing their first home. Depending on your unique situation, you may qualify for a VA loan, an FHA loan, or another government-backed loan. The Department of Veterans Affairs backs VA loans, so lenders take on less risk when providing such a loan. This benefit can be passed on to you in the form of a lower interest rate or higher mortgage.
You may qualify for a VA loan if you are a surviving spouse, qualifying veteran, or active-duty service member. The Federal Housing Administration backs FHA loans, and like VA loans, there is less of a risk to the lender when a debtor takes out an FHA loan. Some of the most compelling advantages of FHA loans include a smaller down payment requirement and lower credit score requirements to qualify.
5. Mistiming the Offer
It is also common for people to mistime their offer on a prospective home. Some people rush into a decision, sometimes even waiving a home inspection. On the other hand, it is not uncommon for people to wait too long to make an offer on a prospective home. If you find a home that checks most of your boxes, you may not want to wait for a home that checks all of your boxes.
6. Buying an Unaffordable Home
You must take an honest look at your expenses and expected future earnings when determining whether you can afford to buy a particular home. A pre-approval can help to give you an idea of how much of a home you can afford. However, the mortgage value that you can get pre-approved for only considers your monthly debt payments and income. It does not account for non-debt-related expenses, like utilities and groceries.
7. Ignoring Their Credit Report
It is also extremely important to keep a close eye on your credit report and credit score throughout the home-buying process. Over 40 million Americans fall victim to identity theft every year, and if your identity is stolen, your credit could be seriously damaged. If there are errors on your credit report, your score could be too low for you to qualify for a mortgage.
On the other hand, you may qualify for a mortgage with errors on your credit report, but your interest rate will be higher than it should be, and you may only qualify for a smaller loan. You should note, though, that it is not enough to just look at your credit report before seeking pre-approval. Your credit report will be reviewed by a lender again shortly before your scheduled closing day. Therefore, it is a good idea not to apply for any new loans and keep up with your current debt repayments.
First-time home buyers are prone to making mistakes. Some of the most common mistakes that you should make an effort to avoid include spending all of your savings, not saving up enough money, and neglecting first-time home buyer programs. If you’re on the market for your first home in Dallas, Austin, or Houston, contact us now at Home Loans With Gary for a free consultation, pre-approval, assessment, or quote.