Given the ways in which the Dodd Frank Act has made it harder for first-time homebuyers to secure a mortgage, it’s more important than ever that these homebuyers go about the process in the right way. Of course, the prospect of homeownership is so exciting that many homebuyers put the cart before the horse, so to speak.
In order to assist first-time homebuyers with the process, we thought that we’d share what we think are some of the most common mistakes that they make. Hopefully by understanding these mistakes, you’ll know how to avoid them so that the process of purchasing your first home isn’t any more difficult than it needs to be.
Buying When You Should Rent
It’s important to remember that a home costs more than its ticket price. For one, you will be responsible for homeowner’s insurance, as well as property taxes and homeowner’s association fees, if applicable. In addition, you will bear the full responsibility for the upkeep and maintenance of your home. These are all costs that you will not incur if you continue to rent your place of residence.
Of course, money that you spend when renting a home is, essentially, lost money. If you do make the jump into homeownership, the monthly payments that you make are not entirely lost, just the portion that you’re paying in interest. However, when you factor in the additional costs of owning a home along with a monthly mortgage payment, the amount you’re paying month-to-month in order to live might be far greater than you’re giving it credit for. So, be sure to do your due diligence on this front before making a purchase.
Judging a Book by Its Cover
When you purchase a home, you are making an investment, one that you get the benefit of living inside of. First-time homebuyers have a tendency only to think of the living in part and not of the investment part. Before you decide to pull the trigger on purchasing a home, it is incredibly important that a thorough home inspection be conducted. Once you’ve signed the papers, the house will be yours, and you’ll be responsible for any defects that it contains, whether it’s substandard wiring or a leaky roof.
All of these things affect the value of the investment that you’ve made, and any expenses you incur with respect to fixing issues have a direct affect on the return on that investment that you can expect to receive. So, don’t just judge the book by its cover, get into the details and make sure that the investment that you’re making is sound.
Not Preparing For the Long Term
Obviously, when you purchase a home, you’re making a commitment to be in a certain area for a lengthy period of time. Many first-time homebuyers underestimate two things. The first is how long that time period actually is, and the second is that this time period is not necessarily set in stone.
Given the investment nature of purchasing a home, first-time homebuyers will expect that, should they need to move in a few years, that they’ll be able to sell their home for a profit. As recent events in the economy have shown us all, this is absolutely not something that can be counted on. The housing market is constantly in flux, and if it’s in a downturn when you’d like to move – or had anticipated moving – you may not be able to, unless you’re willing to take a loss on the investment that you’ve made.
Therefore, it’s important for first-time homebuyers to really make sure that they’re committed to the property they’re purchasing. Also, they will want to assess their risk tolerance should the possibility of needing to move exist, as this has the potential to lead to a negative return on their investments.
Not Preparing For the Short Term
The housing market is competitive, no matter where in the country you’re looking to purchase a home. Often, first-time homebuyers fail to appreciate this, and they lose out on their dream homes as a result. When you find the home that’s right for you, you’ve got to be ready to jump on it. This means that it’s so important that you have all of your ducks in a row before you begin the house-hunting process.
There are a number of things involved in doing this. For one, you’ll want to ensure that you’ve taken control of your credit worthiness. Lenders are much more strict now than they were only a few years ago, and problems with credit could very well keep you from locking up the house that you want. Also, you’ll want to have a war chest of cash ready and available. Many homes, particularly lower priced ones, can go very quickly, and those who are able to make down payments on the spot have a huge advantage.
Failing to Appreciate the Mortgage Market
The idea of homeownership seems easy enough, but it’s seldom as easy as people believe it to be. As a matter of fact, the recent financial crisis has only made it more difficult for homebuyers, especially those who are making their first purchase.
A big reason for this is changes that have taken place in the mortgage market. In order to combat “predatory lending”, the Dodd Frank Act was passed by congress, and this act brought sweeping regulatory reforms to the mortgage market. You can read more about those changes elsewhere in our blog, but the point is that the criteria for securing a mortgage are stricter than they’ve ever been before. So, make sure you’ll be able to secure a mortgage before you set out looking for your dream home.
It’s a Big Decision; Treat It As Such
Choosing to purchase your first home is one of the biggest decisions that you’ll make in your life. As they say, only fools rush in, so make sure you’re keeping these mistakes in mind, and that you’re making sure you’re making the soundest investment possible.