Not having an idea of what you can afford
Since it’s your first time buying a home, it might be hard to know what your price range is when
you have nothing to compare it to. Using an affordability calculator can help you make sure you
are staying within a comfortable range for your family’s needs. Another thing to consider is the
28/36 rule—you shouldn’t be spending more than 28% of your income on housing or more than
36% on your total debt.
Not knowing how much money to put down
While many have heard “20% down” as a rule of thumb, it isn’t a hard and fast rule. According to
US News World Reports, the median down payment for first time home buyers is only 6%.
However, the lower amount of money you put down, the more likely it becomes that you will
have to pay Private Mortgage Insurance, which can become costly. The cost of PMI ranges
from .55 to 2.25% of the original loan. On top of everything else you’re paying, this can really
add up. However, once your LTV (Loan to Value) ratio is 80% or less, you won’t have to worry
about paying PMI.
Not working with a realtor
Some buyers try to purchase a house without a realtor thinking it will save them money.
However, it often ends up costing them, one way or another. For one thing—realtors are
extremely knowledgeable and well-connected. They know the ins and outs of neighborhoods,
what numbers work in the market, and comp sales that would take the average person
hundreds of hours of research to understand. They also have the skills to read the fine print and
know what red flags to look out for. Finally, you might not be saving money at all, since the
seller is usually the one paying the realtor’s commission.
Only talking to one lender
Just like you’d shop around to get the best price on a new pair of sneakers, you’re going to want
to shop around to get the best mortgage rate in town. Ask for the current rates and whether they
are fixed or adjustable. Once you think you’ve found the best rate, lock it in, but continue to
check it. Usually, you can opt for a lower rate within 45 days if mortgage rates drop.
Being unaware of first time buyer and other special programs/discounts
There are many programs to take advantage of as a first-time buyer. First of all, check out
Federal Housing Administration (FHA) loans, which give you easier credit requirements, less
money down (as low as 3.5%), and lower than average interest rates. Check your eligibility
here. If you are a veteran, you may be eligible for a VA loan, which helps you get a competitive
rate without requiring a down payment or PMI. Fannie Mae and Freddie Mac offer government-
sponsored loans at competitive mortgage rates. Finally, you can go green and go easy on your
wallet at the same time with an Energy Efficient Mortgage. This allows prospective homebuyers
to get special benefits when buying an energy efficient home or when buying a home with the
intention to make energy efficient renovations.
Applying for credit or making big purchases prior to closing
Now that you’ve got that “Sold” sign in the ground, it’s the perfect time to pick out a new car to
put in the driveway, right? Think again! Big purchases can affect what you’re approved for right
up until closing. The same goes for opening a new credit card. You just bought a house. Take it
easy for a couple of months and let that sink in.
Emptying your bank account to buy your home
Water heaters break. Roofs leak. You never know what kind of unexpected expense could pop
up during your first few years in your new home. You want a financial safety net in your savings
account in case these things occur. Many lenders even require you to have a cash reserve.
What’s the magic number? Two months worth of PITI (principal, interest, tax, insurance).