When they bought their first home in North Dakota in 2004, Shane Ede and his new wife were completely unprepared financially. With over $60,000 in student loan debt and a combined income that was just over $45,000 a year, their debt-to-income ratio was definitely not in their favor. However, since they did not have an experienced mortgage professional helping them and there was no prequalification process necessary in order to purchase, the Edes were able to buy a nice little 3 bedroom home.
The problem; it was completely out of their budget and they spent the better part of the next few years barely scraping by on what they were making. Unfortunately, young couples like these make home buying mistakes all the time. The thing is, even though lending practices and standards have changed, buying a home for the first time is still a process that, since young couples have no experience with it, can cause them to make choices that can haunt them financially for many years.
With that in mind we put together a blog about the Top 5 home buying mistakes that 1st time buyers make. If you’re thinking of buying a house sometime in the next few years and you’ve never done it before, read our blog and make sure to bookmark it so that you can come back and read it later when your mortgage papers are ready to be signed.
1st time buyer mistake #1: Not managing Credit correctly. Many people believe that they should pay off every last bit of their debt before they purchase a home so that, as their thinking goes, they’ll better qualify for a mortgage. In actuality, credit reporting agencies like Experian look for recent credit history that shows that you’re paying your bills on time and will be able to handle paying off your mortgage as well. Paying off all those credit cards, while basically a good idea, can actually make it more difficult to qualify for a mortgage.
1st time buyer mistake #2: Not being pre-approved but believing that you are. Prequalification for your mortgage is an important step when you’re getting ready to buy a home. If you aren’t prequalified (and a quick conversation with your loan officer and an “instant” credit report certainly doesn’t mean that you are) you could risk paying much higher interest on your mortgage or, even worse, you could miss out on getting a great interest rate.
1st time buyer mistake #3: Using a mortgage loan officer that you don’t know or trust. Remember the Edes? They were the couple that got in over the heads with their first home. One of the main reasons that they didn’t realize what they were in for was because their loan officer was almost no help at all. Having a good loan officer on your side during the entire mortgage process can mean the difference between having a smooth transition to homeowner and purchasing a home that you can afford, to having all sorts of headaches and being stuck with a home that drains your finances dry. Do your due diligence and find someone that is recommended, has plenty of social media reviews that are positive and can show you their credentials and experience.
1st time buyer mistake #4: Using pension or retirement money to purchase your home. This is a really big mistake that many people make, especially first-time home buyers that are in their 30s and 40s and have significant amounts of money in their pension or retirement funds. The fact is, if you need to dip into your retirement fund in order to purchase your home you probably aren’t financially ready. Also, the amount of money you could lose from compound interest could be substantial. Finally, if you do end up using your pension or retirement money, your debt-to-income ratio could be thrown out of kilter and effect your mortgage rates.
1st time buyer mistake #5: Buying someone else’s headache. If you’re considering buying a home that’s in foreclosure or one that’s having a “short sale” you’re probably buying someone else’s home nightmare that they are (or were) desperately trying to get rid of. With a short sale the approval time can take months and negatively affect not only the cost of the house but interest rates as well. As with everything in life, if the “deal” looks too good to be true, it probably is and you should probably walk away.
These 5 mistakes will are made rather frequently but, now that you know about them, you can avoid them when you finally make the big move purchase your very first home. Take your time, make sure to breathe, have a great loan officer helping you and keep looking until you find the house you really want. Then avoid the 5 mistakes above and you’ll be golden.