If you’re looking to buy a new home, you’re not alone. During the last couple of years, home sales in the U.S. have averaged just below the five million mark, thanks to the current and continuing lower interest rates. Unfortunately, not every home buyer has the opportunity to enjoy these lower rates, nor does every home buyer get a good deal, even in a so-called buyer’s market.
Before you start shopping for a home, you need to be aware of the hurdles that may be ahead. Here are five of the biggest mistakes new homebuyers make and how to avoid them.
Not Looking Up Your Credit Score
If you’re in the market for a home, knowing your credit score is crucial, because your FICO score will ultimately determine the cost of your loan. If your score is low, be prepared to pay higher fees, especially up-front costs such as downpayments to your lender. A lower credit score will also keep you from getting the best interest rate available. Typically, if your credit score is below 620, your lender may consider you a “subprime borrower,” or someone who has a higher chance of defaulting on the loan. This can cost you thousands more a year, especially in interest and private mortgage insurance fees.
If you need to find your credit score, you can check it for free at Credit Sesame. You don’t have to give them financial information or anything, so you definitely won’t get charged or scammed.
Not Working to Improve Your Credit Score
Once you know your credit score, the next step is to improve it as much as possible before trying to buy a home. One effective way is to pay down your revolving credit cards. If you can’t pay off your high-balance cards, try to get them down to about 30 percent of their current balance. It also helps to talk to someone who specializes in personal finance, such as a mortgage or credit specialist at your bank. A financial advisor can give you the tools you need to improve your credit score while staying within your budget. If you think you might have errors on your credit report or think that your lenders might be willing to negotiate how they are reporting your score, you can sign up for a credit repair service that can help you with those efforts.
Not Getting a Home Inspection
If you’re thinking with your heart instead of your head, then what looks like your dream home could instead be your worst nightmare. It’s important to get a thorough home inspection to find out if the house has any structural problems, as well as problems (or potential issues) with the plumbing or electrical wiring. A good inspector will also check out the heating, air conditioning and insulation. In addition, it’s also a good idea to bring in an inspector who specializes in pest and termite control.
Not Getting Legal Advice
Even if you think you know what you’re doing, the sober truth is that in today’s housing market, everyone involved will be making a hefty commission out of your home buying transaction, so you need to protect yourself. Get an experienced lawyer to explain your contract thoroughly, because clauses couched in confusing legalese can cost you thousands of unexpected dollars if you don’t read them right.
Not Budgeting Sufficiently
Budgeting means a great deal more than figuring out the costs of furnishings and fixtures; it also means figuring in essentials such as adequate insurance coverage (including flood insurance, if you live in a high-risk area). You’ll also want to get an accurate assessment of all your monthly utility fees, including electricity, water rates, waste management and recycling services and pickups and any other necessary services. Plus, does the neighborhood have a homeowners association? If so, you’ll need to budget for HOA membership fees, which can be pretty pricey depending upon where you live. In addition, you’ll also want to budget for an effective home security system, as well any other necessary home security accessories that you’ll need to add to your home. You’ll also need to consider landscaping and lawn maintenance costs, on both a regular and seasonal basis.
If you want to figure exactly how much you can afford when it comes to buying a house, you can use this mortgage calculator.
Buying a home doesn’t need to be traumatic or complicated, as long as you prepare yourself and your finances ahead of time. By taking control of your personal finances and getting expert advice, you can turn your home-buying transaction into a simpler, and ultimately rewarding, experience.