Top 8 First-Time Home Buyer Mistakes
By RateMarketplace.com Staff
First-time home buyers often err in ways that can cost tens of thousands of dollars in unnecessary real estate expenses. Discover eight mistakes first-time home buyers often make when buying their first house, finding a real estate broker, and obtaining a first mortgage:
- Overreaching on purchase price: Avoid the temptation of stretching your budget and becoming "house poor" -- i.e., impoverished by a burdensome monthly mortgage payment that severely strains your household finances. Remember you can always buy a nicer, costlier home in the future -- and probably will.
- Not rehabbing your credit score: Check your credit reports at least six months before you begin actively shopping for your first house to know what mortgage rate you'll likely qualify for. Challenge mistakes on your reports from the big three reporting agencies -- Equifax, Experian and TransUnion. If your credit score is under 600, consult a credit counselor on how to raise it. If you don't, you might not even qualify for a subprime home loan or could face an exorbitant mortgage interest rate.
- Underestimating ARM risks: Even in stable markets, first-time home buyers often take out adjustable rate mortgages (ARMs) with fixed-rate periods of just one to three years because that's the lowest initial rate they can get. Using an ARM loan to successfully squeeze into a maximum monthly payment can mean colossal failure if rates re-adjust sharply upward. You could then be strapped with too costly monthly mortgage payments and face the risk of home foreclosure.
- Hiring just any real estate broker: When shopping for a real estate broker, call several realty firms, ask for their top broker in your area based on total sales, and select the one with whom the chemistry seems right. Top brokers know they won't make as much commission off a first-time home buyer's purchase, but they became top brokers because they served those customers well to retain their "move-up" business.
- Overlooking fixer-uppers and smaller homes: If you buy a smaller home or fixer-upper, you won't be paying for the cost of recent renovations or square footage you don't immediately need. Instead, you can finance your own home improvement projects out-of-pocket over time or from a home-equity loan in the future. Another plus: In weak housing markets, fixers and small single-family homes often are the biggest bargains because of the widespread availability of larger, updated properties.
- Failing to get a home inspection: In an effort to save on closing costs, many first-time home buyers forego paying a professional inspector to assess the condition of a property and write a report documenting all shortcomings and needed repairs. Undiagnosed house problems could reveal too late why that bargain buy was so cheap -- and cost far more than that initial estimated $350 home inspection.
- Buying the best house in the worst neighborhood: Don't ignore the axiom, "Buy the worst house in the best neighborhood." The overall appreciation is likely to be lower on the best house in a lesser neighborhood than a not-so-great house in a wonderful neighborhood. As important, any improvements made to that "best" home will likely recoup less on a percentage basis than improvements made to the "worst" house.
- Not comparison shopping mortgage rates: Real estate brokers often put buyers into loans that make the most money for themselves. Put great independent effort into shopping for the lowest available mortgage rate (and closing-cost package). The difference of a single percentage point on a $200,000 mortgage can cost you nearly $50,000 over the life of a 30-year loan. That's nearly $150 a month.
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