Knowing when the best time is to buy your first home is essential, as many contributing factors can hinder the experience. Take into account the following aspects that can be potential pitfalls for a first time home buyer.
Bad Credit Score
Having a bad credit score will affect the home loan you are able to receive. With a conventional fixed-rate mortgage, you may attract higher interest rates and additional fees. It is much more advantageous to work toward improving your credit score before applying for a mortgage loan.
Having Too Much Debt
When purchasing a home, a mortgage lender will assess your debt-to-income ratio (DTI). If your DTI is too high, you may have a hard time getting approved for a mortgage. Consider paying as much debt off as you can before applying for a mortgage, as this will significantly affect the interest rates and other fees you attract.
Limited Down Payment
As a rule of thumb, a 20% down payment is the ideal amount to put toward the purchase of a home. The more you pay upfront, the lower your monthly repayments will be, and the more money you will save in the long term. Although some home loans only require 3% or less, paying more upfront is a smarter financial move.
Expensive Real Estate Market
Knowing the best time to buy is essential. Research the area where you are most interested in purchasing a home to learn whether home values have fallen or risen over the past year. Zillow is an excellent source providing information on median listing and sale prices of properties in specific areas and states as a whole. Take into consideration the risks involved in buying homes in certain areas prone to natural disasters. Homes in more turbulent areas may require expensive homeowner’s insurance.
Not Knowing All the Costs Involved in Home Ownership
Beyond purchasing a home and making regular mortgage payments, homebuyers have other recurring costs that need to be factored into the responsibility of owning a home. These costs include annual property taxes, homeowner’s insurance, utility costs, home maintenance, and closing costs. Property taxes will vary between states and counties. The national average effective property tax rate is 1.08% of the final purchase price.
A suitable homeowner’s insurance policy is another annual cost homeowners face. Most premiums fall between $1,000 to $2,000 annually with additional costs for flood and earthquake coverage. This will differ depending on insurance companies, location, and the home that you own.
Utility costs average just under $3,000 nationally over the course of a year. Factors such as water, lawn care, heating, and cooling systems will affect your total annual cost for utilities.
Home maintenance, such as general upkeep is another aspect to consider. This includes any repairs, minor or serious, required to maintain your home’s condition.
Additional costs are incurred when finalizing the sale of a home. These are referred to as closing costs and pertain to mortgage taxes, attorney fees, title insurance, and other fees that might be mandated by state law.
Purchasing a home is usually the biggest expense and financial decision most people make. Unfortunately, many first time home buyers are not truly prepared for what it takes to be a successful homeowner.
Renting is a great option until you have your finances in order and are ready to set yourself up with a new home purchase. Homeownership is a great way to build wealth – if it’s done responsibly.
Before you purchase your first home, be sure to do the following:
- Improve your credit score to lower your interest rate.
- Your debt to income ratio needs to be as low as possible. Avoid having too much debt.
- Aim for a 20% down payment to avoid having to pay for private mortgage insurance.
- Study the market. Home prices fluctuate on a regular basis – avoid buying on a price peak if possible.
- Understand how many expected and unexpected expenses come with homeownership. Have cash reserves to combat surprise costs.