Buying a home is an exciting but daunting experience. And with multiple steps involved, it can be easy to make some first-time homebuyer mistakes. However, understanding these mistakes beforehand can help set you up for a smoother process and might save you more in the long run.
To get prepared for buying your first home, here are the common mistakes that you need to avoid:
One of the most exciting parts of homebuying is shopping for homes. However, before doing so, it's important that you get pre-approved first.
The mortgage pre approval process involves an in-depth review of your finances. It's the lender's way of knowing how much they should loan you based on your creditworthiness. To get pre-approved, you need to prepare:
Although a mortgage pre-approval is not a guarantee that you'll get a loan, it can help you determine how much money you can borrow. Additionally, most sellers nowadays prefer buyers who are pre-approved. So if you want to increase your buying power, then get a mortgage pre-approval.
If you have a great credit score, you might be approved for a higher loan amount. This can be exciting especially if you've been dreaming of a huge, beautiful house. However, you have to keep in mind that mortgages have interests. And the larger the amount you owe, the bigger your monthly repayments will be. Therefore, it's always better to know how much house can you afford before taking out a loan.
A good method to determine how much house you can afford is by using the 28%/36% rule. This rule states that you should not spend more than 28% of your gross monthly income on home-related expenses and 36% on your total debts, including your mortgage.
For example, if your gross monthly income is $7000, and your existing debt is $1000, then your mortgage should only be $1520.
When creating a budget for your future home, consider your income, debts, and expenses, as well as your cash reserves. If you take out a bigger mortgage than what you actually need then you might be able to buy a high-end property but end up becoming 'house poor.'
One of the greatest advantages of being a first-time homebuyer is the housing programs available for you. Housing prices have been increasing each year. So to help first-time homebuyers get into homeownership, institutions such as the Florida Housing Finance Corporation have been providing residents with a range of affordable housing opportunities.
Some of the programs provided by Florida Housing include:
Florida Housing offers several 30-year, fixed-rate mortgages to qualified first-time home buyers. These mortgages can be combined with the downpayment and closing costs assistance programs. Borrowers of these programs often have lower mortgage insurance costs.
Coming in the form of a second mortgage, down payment and closing costs assistance programs are offered to eligible first-time home buyers. However, these programs are not available as a stand-alone offer and should always be combined with the homebuyers programs.
One of the most popular mortgages is the conventional loan which is backed by private institutions Fannie Mae and Freddie Mac. Most borrowers think that you need a larger down payment of 20% on a conventional mortgage, but that is not the case. For first-time homebuyers, you'll only need to put a 3% down payment with this type of mortgage. But since your down is less than 20% you'll be paying for mortgage premium insurance (PMI). PMI will automatically cancel once it reaches 78% of your original mortgage balance.
However, the challenge for most first-time homebuyers is the requirements needed for conventional mortgages. To qualify, you'll need a credit score of at least 620 and a debt-to-income ratio (DTI) of 45% or lower.
Thankfully, there are government-backed home loan programs that a first-time home buyer might be eligible for.
Compared to conventional loan programs, Federal Housing Administration loans have more relaxed requirements. It is often a great choice for those who just started building their credit scores as you'll only need 580 with a minimum down payment of 3.5%.
The possible disadvantage with FHA loans, however, is the mortgage insurance premiums (MIP). Unlike conventional loan's PMI, MIP will last for the life of the loan or up to 11 years if you put a 10% down payment. One way to get rid of MIP is to get a mortgage refinance into a conventional loan once you reach 20% equity on your home.
Backed by the Department of Veteran Affairs, VA loans are offered to U.S. service members, veterans, and eligible surviving spouses. Some of the benefits of VA loan programs include a 0% down payment, no closing costs, and no mortgage insurance required. Although you'll be paying a funding fee, it is only a one-time payment that can also be rolled into the mortgage.
To be eligible for a VA loan you have to at least one of the following guidelines:
Additionally, you also have to meet the credit and income requirements set by the lenders. And to verify your VA eligibility, you'll need to provide a Certificate of Eligibility.
USDA loans are backed by the United States Department of Agriculture. And just like the VA loan, USDA loans don't require a down payment. However, it can only be used in a USDA-approved rural area. Additionally, the borrower's income should not be more than 15% of the area's median income. You would also have to prepare for an upfront guarantee fee of 1% of the loan amount as well as an annual fee of 0.35%.
It's great to aim for a 20% down payment to have a lower monthly mortgage payment, more favorable loan terms, and avoid mortgage insurance. But you have to keep in mind that a down payment is not the only out-of-pocket expense you need to prepare for when buying a house. Some expenses might include earnest money, closing costs, and moving costs. So using up all of your savings for the down might cause a serious financial problem.
The home buying process might include securing financing, house hunting, making an offer, and more. And for a first-time homebuyer who's new to the housing market, these steps might be overwhelming.
Fortunately, help is available in the form of a mortgage broker. A mortgage broker can process your application for you, saving you time and effort. Not to mention that they are affiliated with multiple mortgage lenders, giving you access to home loan products and deals not available with your regular bank.
Additionally, most mortgage brokers work with a large network of real estate agents. So if you need one, a mortgage broker can help set you up.
As mentioned above, even if you already have a mortgage pre-approval, you might still get denied a mortgage in the end. One of the things that can get you denied a home mortgage is applying for a new credit line during the mortgage process.
Your mortgage lender will check your credit multiple times, usually during mortgage pre approval and before closing the sale. Applying for a new line of credit, closing an account, and even making big purchases, might hurt your credit score and increase your debt-to-income ratio. If your credit score takes a dip, you might get disqualified or offered a higher mortgage rate.
If you want to take a new credit line, then wait until you've closed on your home. Also, don't forget to pay your bills, credit cards, and other debt repayments on time.
Let's imagine that you already got approved with your mortgage and you finally have the keys to your new home. So what's next?
If you think you've been spending too much money on renting, then getting a home you can call your own might be one of your dreams. However, there are some costs that you need to consider that weren't much of an issue when you were renting. Here are some of the homeownership costs that you might need to include in your budget:
Property taxes are taxes paid by a property or building owner. These taxes are calculated by the local government where the property is located and are used to fund public services or improvements.
Homeowners insurance is a type of property insurance. It covers damages and losses on a private residence as well as the assets within the property. However, it may not cover damages caused by certain "acts of God" such as floods, hurricanes, and earthquakes.
Homeowners insurance is required by most mortgage lenders as a condition for approving your mortgage.
If you buy a property in a neighborhood that has an established homeowners association (HOA), then you will have to pay HOA fees. These fees are due either monthly or quarterly. They are often used to pay for the amenities and services in the community.
Now that you have your own home, you'll be handling all the costs for its repairs and upkeep. Typical repairs and maintenance include HVAC, plumbing, and electrical system.
One rule of thumb when it comes to budgeting for the upkeep is saving 1% of your home's purchase price. Another is the square-footage rule which states that you save $1 per square foot of your property. However, keep in mind that the actual costs for repairs and maintenance will depend on a lot of factors including the location and condition of your home.
A home inspection is often done to discover any life-threatening problems such as faulty wiring or molds. Most lenders require a home inspection performed by a professional, third-party inspector.
If you are able to put in a 20% down payment, you might have the choice to waive the inspection. However, you might also not be able to uncover possible serious issues that could turn into a bigger and more expensive problem in the future.
Depending on the findings of the home inspection, the home buyer can renegotiate the price of the property or call the whole deal off.
As you may have noticed, buying a home is not really cheap. There are a lot of things that you need to budget for including down payment, insurance, closing costs, and more. So if you want to get those expenses back, you might have to stay in your home for a while.
If you plan to sell the home eventually, you might have to wait a few years for the value to rise or at least earn back the money you spent on closing costs. You also have to remember that your monthly payments don't all go to paying off the principal balance. In fact, during the first few years, most of your repayments might actually be spent on interest.
There's more to buying a house than just the initial costs. It's also important to consider how long you'll be staying and your goal for buying. It might also help to consider possible future changes such as switching jobs or your children going to school.
Home Buying can be a long and stressful process for first-time homebuyers. But thankfully, mortgage brokers are available to help. If you're looking for a mortgage broker in Tampa, Ebenezer Mortgage Solutions is just one call away. Contact us today at (813) 284 - 4027 and let's start on getting you into your first home.