The Buyer Fails to Plan for the Home Purchase
Consulting with a mortgage lender and taking a frank look at their financial situation should be the first step in the home buying process. And in many cases, it should begin many months before beginning to shop for real estate. Not only does this allow the prospective homeowner additional time to shop for a lower mortgage rate, it allows them the opportunity to improve their financial standing. A good credit rating will put a prospective buyer in a mortgage, but a very good to excellent credit rating will open the buyer up to the more attractive interest rates available. By correcting credit report errors, paying down credit cards, student loans and car payments, a credit rating should improve. Saving more for a down payment can eliminate the necessity for mortgage insurance. There are dozens of good reasons to plan ahead, but only pitfalls for failure to do so.
The Buyer Borrows up to the Limit of the Loan Approval Amount
Many first time home buyers often forget that the loan approval amount is the maximum amount the mortgage company will lend, not the minimum. The approval amount doesn’t often take into account other expenses of the borrower, such as job expenses, medical expenses or the cost or raising children. It is up to the borrower to create an honest and frank budget, including all anticipated expenses, and stick to that their budget, regardless of the loan approval amount.
The Buyer Fails to Account for Future Home Expenses
With a fixed rate mortgage, the principal and interest portion of the monthly house payment will remain the same. On the other hand, a homeowner should anticipate that real estate taxes and homeowner’s insurance will increase. Additional taxes and insurance can add several hundred dollars to a monthly payment. For those who have borrowed to the limit of their budget, this can put a stress on the monthly expenses. Home maintenance is another area that many do not account for. When an item breaks down in a rented property, the landlord fixes the item or replaces it. But once a new home is purchased, there is no landlord to pay for repairs. The money comes from the new owner’s budget.
The Buyer Fails to Account for Future Life Events
Life brings on change and through the life of the mortgage, the borrower will go through many changes. Some of these changes can deeply affect the ability to repay a mortgage. For example, most first time home buyers are younger couples or single people. If married, the chance of children coming into the picture is likely. When both parties are working, child care is a necessity. And as any parent can attest, the cost of child care is extremely expensive. It will often be the number two line item on the family budget, sometimes exceeding $1,000 per month. Every first time purchaser must not only take a look at their present financial situation, but make a reasonable projection of their life status a few years down the road.
The Borrower Incurs Additional Credit After the Loan is Initially Approved
This mistake is more common than people realize and has a double detrimental effect. First, before the loan closes, the lender will always perform a second credit check. Incurring a new car loan or an expensive furniture loan will show up on the updated credit report. This will affect the final mortgage rate offered by the lender. In addition, the borrower has now incurred additional debt, on top of their most expensive lifetime purchase. Though it is tempting to fill the new house with the best of everything, the buyer sometimes needs to demonstrate restraint and look back at their original budget.
The Borrower Fails to Retain the Right Professionals
In the legal profession, it is often said that “he who represents himself has a fool for a client”. Many buyers refuse to consider the option of retaining a buyer’s real estate professional to guide them through the process. In many cases, a buyer agent’s fee may come from the total sales commission on the property, costing the buyer little or nothing. A buyer’s representative has a number of advantages. Because he or she is familiar with the current market area, a more informed and objective opinion can be given as to a purchase offer or counteroffer. A quality buyer’s representative can save the buyer thousands in this area, by using their expertise to gauge real market value.
The first home purchase is one of the most wonderful events a person can experience, providing a sense of pride and achievement. But the exuberance of the buyer sometimes needs to be tempered with a little knowledge, a little restraint and some common sense financial advice.