For many Americans, a mortgage is the most significant debt they will ever carry. And, a home is the most expensive purchase they will ever make. As such, that is why it is so important to avoid common mistakes and pitfalls when it comes to financing a home. At Scott Jones Real Estate, we want to help you make homeownership as joyful an experience as possible. To that end, we’ve put together some common financing pitfalls and how to avoid them, so that you can get on the road to long term financial security.
Not checking your credit report beforehand
Before you go shopping for a mortgage, you should order copies of your credit report from the three main credit reporting agencies: Transunion, Equifax, and Experion. You can request one free copy per year of your credit report from each agency. You might be pleasantly surprised by what you find – if your credit report has errors or your score is lower than expected, you should fix that before you apply for loans.
Ideally, you will check your credit at least six months before going shopping for a mortgage. This will provide enough time to fix mistakes, which are commonly found, or to improve your score. Getting your credit in the best shape possible can pay off when shopping for a mortgage. Credit scores above specific benchmarks can mean a lower interest rate, which can add up to considerable savings in your interest rate and fees.
Making yourself house poor.
When you are considered “house poor,” you are committing too much of your family’s monthly income to housing-related costs, which leaves little funds left over for other living expenses. Over time, this may force your family to make compromises that jeopardize your financial future or even security. For example, having to devote an excessive amount of funds to housing costs may make you forego saving for retirement, building a college fund for your children, or upgrading your family’s vehicles.
Generally, it would be best if you tried to devote no more than 28% of your gross monthly income on housing.
Ignoring the actual cost of homeownership
This tends to take many first-time buyers off-guard. Owning your own home means that you are financially responsible for all maintenance and repairs. Each year count on budgeting around 2% of your home’s purchase price for routine maintenance, and even more if your home is on the older side.
Also, don’t forget about property taxes. Every year, property taxes add on to the total cost of homeownership. Before you buy, learn as much as you can about your area’s property tax system and policies.
Lastly, consider if your home may require specialized insurance. In our area, earthquake insurance can add to the total cost of homeownership.
Not shopping around for the best loan
It would help if you shopped around for the best loan in the same way that you would compare prices on airline tickets. Doing your due diligence on mortgage shopping can save you tens of thousands in fees and interest over the lifetime of your loan.
However, few people actually shop around for the best deal on a mortgage. And we can understand why comparison shopping for mortgages can take a backseat when you’re picking out a new house. Still, it is worth it and can pay off handsomely to shop around for the best loan for your needs.
Not putting enough down
Most lenders recommend putting around 20% down to get the best rates and avoid having to purchase mortgage insurance, which is an extra cost that can add approximately $100 to your monthly payments.
Why is mortgage insurance something you should avoid? Because mortgage insurance is an additional monthly cost that only benefits the lender, and it usually takes around two to seven years to build enough equity to stop having to pay the premiums for mortgage insurance. In the case of FHA loans, borrowers must pay for mortgage insurance until the loan is paid in full.
Not seeking out a VA loan if you qualify
Veterans Administration loans are among the best mortgages out there for those who qualify. If you meet the requirements for a VA loan, you can take advantage of things that can save you lots of money and headaches like:
- Protections from the VA to ensure that you do not overpay and that your home is move-in ready and free of unexpected problems.
- No down payment or mortgage insurance required for purchases under a certain amount in most areas.
- Heavily restricted amounts and types of closing costs that you can be charged.
- Favorable interest rates, even if you have poor credit or are heavily in debt.
Granted, VA loans also have some drawbacks, including a funding fee, which can range to over 3% of your total amount borrowed. However, it can be added to your loan, which will save you on up-front costs. Also, if you have a service-connected disability, the funding fee will be waived.
Borrowing when you intend to move in a few years
To get the most out of your mortgage, homeowners should plan on being in their home for at least five years. In the case of buying a home, if you move out before that milestone, it is unlikely that you will make up the closing costs or other fees compared to what you’ve paid in rent. If refinancing, you are unlikely to recoup the cost of a higher interest rate if you relocate too soon. Moving before reaching your break-even point can end up costing you more than you intended or planned to pay.
Going with the wrong agents
Choosing an agent who understands your needs will make all the difference in avoiding these and other financial pitfalls. They have the experience you need to guide you to the home that will fit your financial situation and goals. At Scott Jones Real Estate, we pride ourselves on using our knowledge and know-how to help our clients get the best deal possible. Contact us today to see how we can help you!