12 Common First-Time Home Buyer Mistakes and How to Avoid Them

12 Common First-Time Home Buyer Mistakes and How to Avoid Them

Reposted from NerdWallet.com
First-time home buyers are prone to missteps, such as getting just one rate quote. Here are some common errors and how to steer clear of them.
Every year, first-time home buyers venture into the market and make the same mistakes that their parents, siblings and friends made when they bought their first houses.

But today’s novice buyers can stop the cycle. Here are 12 mistakes that first-time home buyers make — and what to do instead.

 

1. Not figuring out how much house you can afford

Without knowing how much house you can afford, you might waste time. You could end up looking at houses that you can’t afford yet, or visiting homes that are below your optimal price level.

For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won’t keep them up at night. Sometimes it’s a good idea to aim low.

How to avoid this mistake: Use a mortgage affordability calculator to help you know what price range is affordable, what’s a stretch and what’s aggressive.

 

2. Making a down payment that’s too small

You don’t have to make a 20% down payment to buy a home. Some loan programs (see item No. 5) enable you to buy a home with zero down or 3.5% down. Sometimes that’s a good idea, but homeowners occasionally have regrets.

In a survey commissioned by NerdWallet, one in nine (11%) homeowners under age 35 agreed with the statement “I should have waited until I had a bigger down payment.” It was one of the most common regrets that millennial homeowners had.

How to avoid this mistake: Figuring out how much to save is a judgment call. A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments. The downside of taking the time to save more money is that home prices and mortgage rates have been rising, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase. The key is making sure your down payment helps you secure a payment you’re comfortable making each month.

In another survey commissioned by NerdWallet, millennial homeowners described how long it took to save for a down payment. Among millennials who had bought a home in the previous five years, it took an average of 3.75 years to save enough to buy. So if it’s taking you three or four years to save up, you have plenty of company.

 

3. Emptying your savings

If you buy a previously owned home, it almost inevitably will need an unexpected repair not long after. Maybe you’ll need to replace a water heater or pay a homeowner’s insurance deductible after bad weather.

“That’s a growing pain for the first-time homeowner, when stuff breaks,” says John Pataky, executive vice president of the consumer division of EverBank. “They find themselves in a hole quickly” if they don’t have enough saved for emergencies.

How to avoid this mistake: Save enough money to make a down payment, pay for closing costs and moving expenses, and take care of repairs that may come up. Lenders will give you estimates of closing costs, and you can call around to get estimates of moving expenses.

 

4. Not looking for first-time home buyer programs

As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs. But don’t make the error of assuming that you have to delay homeownership while saving for a huge down payment. There are plenty of low-down-payment loan programs out there, including state programs that offer down payment assistance and competitive mortgage rates for first-time home buyers.

Yes, 11% of millennial homeowners say they regret not making a bigger down payment. But the vast majority don’t express such a regret.

How to avoid this mistake: Ask a mortgage lender about your first-time home buyer options and look for programs in your state. You might qualify for a U.S. Department of Agriculture loan or one guaranteed by the Department of Veterans Affairs that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.5%, and some conventional loan programs allow down payments as low as 3%.

 

5. Ignoring VA, USDA and FHA loan programs

A lot of first-time home buyers want to or need to make small down payments. But they don’t always know the details of government programs that make it easy to buy a home with zero or little down.

How to avoid this mistake: Learn about the following loan programs:

  • VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. They’re for people who have served in the military. VA loans’ claim to fame is that they allow qualified home buyers to put zero percent down and get 100% financing. Borrowers pay a funding fee in lieu of mortgage insurance.
  • USDA loans can be used to buy homes in areas that are designated rural by the U.S. Department of Agriculture. Qualified borrowers can put zero percent down and get 100% financing. You pay a guarantee fee and an annual fee in lieu of mortgage insurance.
  • FHA loans allow for down payments as small as 3.5%. What’s more, the Federal Housing Administration can be forgiving of imperfect credit. When you get an FHA loan, you pay mortgage insurance for the life of the mortgage, even after you have more than 20% equity.

6. Getting just one rate quote

Shopping for a mortgage is like shopping for a car or any other expensive item: It pays to compare offers. Mortgage interest rates vary from lender to lender, and so do fees such as closing costs and discount points.

But according to the Consumer Financial Protection Bureau, almost half of borrowers don’t shop for a loan.

How to avoid this mistake: Apply with multiple mortgage lenders. Research from Freddie Mac indicates that borrowers could save an average of $1,500 over the life of the loan by getting one more rate quote, and an average of $3,000 if they get five rate quotes. All mortgage applications made within a 45-day window will count as just one credit inquiry.

 

7. Not checking credit reports and correcting errors

Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.

How to avoid this mistake: You may request a free credit report each year from each of the three main credit bureaus. You may dispute any errors you find.

 

8. Not knowing whether to pay discount points

Mortgage discount points are fees you pay upfront to reduce your mortgage interest rate. Interest rate savings can add up to a lot of money over the life of a mortgage, and discount points are one way to gain those rate savings if you’re in the right position to purchase them.

How to avoid this mistake: If making a minimal down payment is an accomplishment, the choice is simple: Don’t buy discount points. If you have enough cash on hand, the value of buying points depends on whether you plan to live in the home longer than the “break-even period.” That’s the time it takes for the upfront cost to be exceeded by the monthly savings you get from a lower interest rate.

 

9. Applying for credit before the sale is final

One day, you apply for a mortgage. A few weeks later, you close, or finalize, the loan and get the keys to the house. The period between is critical: You want to leave your credit alone as much as possible. It’s a mistake to get a new credit card, buy furniture or appliances on credit, or take out an auto loan before the mortgage closes.

Here’s why: The lender’s mortgage decision is based on your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments. Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio. Neither of those is good from the mortgage lender’s perspective.

Within about a week of the closing, the lender will check your credit one last time. If your credit score has fallen, or if your debt-to-income ratio has gone up, the lender might change the interest rate or fees on the mortgage. It could cause a delay in your closing, or even result in a canceled mortgage.

How to avoid this mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. It’s OK to have all those things picked out ahead of time; just don’t buy them on credit until after you have the keys in hand.

 

10. Shopping for a house before a mortgage

It’s more fun to look at homes than it is to talk about your finances with a lender. So that’s what a lot of first-time home buyers do: They visit properties before finding out how much they are able to borrow. Then, they are disappointed when they discover they were looking in the wrong price range (either too high or too low) or when they find the right home, but aren’t able to make a serious offer.

How to avoid this mistake: Talk to a mortgage professional about getting pre-qualified or even preapproved for a home loan before you start to seriously shop for a place. The pre-qualification or preapproval process involves a review of your income and expenses, and it can make your bid more competitive because you’ll be able to show sellers that you can back up your offer.

Neal Khoorchand, broker-owner of Century 21 Professional Realty, in the South Ozone Park neighborhood of Queens, New York, pre-qualifies his clients before showing them properties.

“If you’re qualified for a one-family house for $500,000, we’re not going to show you a one-family for $600,000 — it would be a waste of time,” he says.

 

11. Underestimating the costs of homeownership

After you buy a home, the monthly bills keep stacking up. This can come as a surprise if you’re not ready.

“It’s not just your mortgage payment,” says Seth Feinman, vice president of Silver Fin Capital, a mortgage brokerage in Great Neck, New York. “You’re going to have the oil bill, the gas bill, you’re going to have a cable bill, you’re going to have all these things that the bank doesn’t care about when qualifying you for a mortgage.”

Renters often pay these kinds of bills, too. But a new home could have higher costs — and it might come with entirely new bills, such as homeowner association fees.

How to avoid this mistake: Work with a real estate agent who can tell you how much the neighborhood’s property taxes and insurance typically cost. Ask to see the seller’s utility bills for the last 12 months the home was occupied so you have an idea how much they will cost after you move in.

 

12. Miscalculating repair and renovation costs

First-time home buyers are frequently surprised by high repair and renovation costs. Buyers can make two mistakes: First, they get a repair estimate from just one contractor, and the estimate is unrealistically low. Second, their perspective is distorted by reality TV shows that make renovations look faster, cheaper and easier than they are in the real world.

How to avoid this mistake: Assume that all repair estimates are low. James Ramos, owner of Re/Max Bay to Bay, a real estate brokerage in Tampa, Florida, recommends doubling the estimates to get a more realistic view of costs.

Seek more than one estimate for expensive repairs, such as roof replacements. A good real estate agent should be able to give you referrals to contractors who can give you estimates. But you also should seek independent referrals from friends, family and co-workers so you can compare those estimates against ones you receive from contractors your agent refers.

 

The Wave of Millennial Homebuyers Continues to Swell Across Hunterdon and Somerset Counties

The Wave of Millennial Homebuyers Continues to Swell Across Hunterdon and Somerset Counties

Many have written about the millennial generation and whether or not they, as a whole, believe in homeownership as a part of attaining their American Dream.

Comparatively speaking, millennials have taken longer to obtain traditional milestones (like getting married, having kids and buying a home) than generations before them, but that does not mean that they do not aspire to still achieve those things.

For older millennials (aged 25-34) who have established themselves in their career and are starting to build their families, homeownership is the next logical choice.

According to the Urban Institute’s State of Millennial Housing, the probability of a millennial becoming a homeowner increases by 17.9% if they are married, and by an additional 6.2% if they have children.

Last year, according to the US Census Bureau, the average age at first marriage was 30 for men and 27 for women, while the National Association of Realtors (NAR) reports that the average first-time homebuyer was 32 years old.

With most of this generation having yet to age into the ‘Responsibility Zone’ (the time in their lives when their responsibilities start to dictate their behaviors), there will be a steady wave of buyers for years to come!

Those who are currently out in the market searching for a home are being met with a strong, highly competitive seller’s market. NAR’s Chief Economist Lawrence Yun recently commented,

“Realtors® throughout the country continue to stress that there’s considerable pent-up demand for buying a home among the millennial households in their market.  

Unfortunately, they’re just not making meaningful ground, and continue to be held back by too few choices in their price range, and thereby missing out on homeownership and wealth gains.”

Bottom Line

If you are currently renting and thinking about jumping into the real estate market this year, let’s get together to help you navigate our market.

 

 


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Millennials Are Skipping Starter Homes for Their Dream Homes

Millennials Are Skipping Starter Homes for Their Dream Homes

A new trend has begun to emerge. With home prices skyrocketing in the starter home category, many first-time homebuyers are skipping the traditional starter homes and moving right into their dream homes.

What’s a Starter Home?

According to the National Association of Realtors (NAR), simply put, a starter home is a one or two-bedroom home (sometimes even a small, three bedroom).Prices vary widely by market but starters on average cost $150,000 to $250,000 while trade-up and premium homes cost upwards of $300,000.”

Finding Their Forever Homes Now

A recent CNBC article revealed that there are many factors that delayed older millennials (ages 25-35) from buying a home earlier in their lives. The aftereffects of the Great Recession teaming up with larger education costs forced many to either remain living in their parent’s homes or to rent.

With the economy continuing to improve, many millennials have been able to break into better-paying jobs which has helped spur down payment savings. As the dream of homeownership comes closer to reality, many millennials are saving for their forever homes.

According to the latest statistics from NAR, 30% of millennials bought homes for $300,000 or more this year (up from 14% in 2013). Diane Swonk, Chief Economist at Grant Thornton weighed in saying, “They rented for longer. Now they’re going to where they want to stay.”

More and more millennials are settling down, getting married, and starting families, which is a huge factor driving them to look for larger homes.

Increased competition in the starter home market has also been a driving force in waiting to afford their dream homes. Inventory in the starter home market is down 14.2% from last year, according to research from Trulia. This has driven prices up and has led to bidding wars.

Many first-time buyers who were originally looking for starter homes are realizing that for just a little bit more of an investment, they could afford trade-up or premium homes instead.

Bottom Line

If you plan on purchasing your first home this year, let’s get together to determine how much house you can afford. You may be pleasantly surprised.

 


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Get The Home You Want, Millennials: Smart Strategies For First-Time Homebuyers in Hunterdon and Somerset Counties

Get The Home You Want, Millennials: Smart Strategies For First-Time Homebuyers in Hunterdon and Somerset Counties

Hey, Millennials. Come on into the real estate market! We really need you to buy some homes so we can keep chugging along. Oh, wait. Prices are rising and so are interest rates, plus inventory is scary low. Hmmm. Well, come on in anyway, wontcha?

It’s not easy to buy a home in a hot market where inventory remains at historic lows – and that covers a lot of areas across the country at a wide range of different price points. But it’s especially hard right now for Millennials, who aren’t exactly getting a warm welcome from the market that has been begging them to participate.

“I think it’s fair to say this is the most competitive housing market we’ve seen in recorded history,” Danielle Hale, chief economist for Realtor.com, told Curbed. “There’s record low inventory and strong interest from buyers in getting into the housing market. Millennials are reaching prime homebuying age – in 2020, the greatest proportion of that generation will be turn 30 – just as baby boomers are looking to downsize. This has created especially fierce competition for smaller homes, the type of starter homes that most first-time buyers desire. This dynamic can be especially frustrating for young adults because they may be bidding for the same smaller home as someone from an older generation who can lean on the accumulated wealth of decades of homeownership.”

But that doesn’t make buying impossible – just a bit more challenging. Get a leg up by following a few smart strategies.

Work with the right REALTOR®

This is not the right time to give your brother-in-law’s cousin’s neighbor who just got his license a shot. Having a competitive edge is more important than ever, and you need a savvy, experienced, and well-connected real estate agent to help you buy a home.

Work on your down payment

You may be competing against buyers who are coming in with an all-cash offer, which you’re going to have a hard time standing up to. But, there are ways you can make your offer look better. Remember that if it comes down to a multiple-offer situation for your home, sellers won’t just compare the offer prices. They’ll look at your down payment and the terms, and you need to have better terms than the next guy. You may only have 3.5% down, and that may be all you need to qualify for your FHA loan, but that doesn’t mean the seller will embrace you.

“Your down payment is a key part of the offer you present to the seller,” said Money Crashers. “The general rule of thumb is simple: the larger the down payment, the stronger the offer. More precisely: the greater the down payment’s share of the total purchase price, the more likely the seller is to accept.”

If you’re ready to buy and there’s no time to get a second job or go into hyper-savings mode, you can always take advantage of down payment assistance programs like the National Homebuyers Fund or hit up a relative. “If you’re struggling to pool enough cash for your down payment, a generous relative or friend can help by giving you money,” said NerdWallet. “But the money must be a true gift, not a disguised loan, and it must be documented properly through financial statements and a gift letter. If the gift is really a loan that you have to pay back, lenders won’t accept it.”

Be flexible on the closing

If another potential buyer is insistent on a 30-day close, but you could close earlier, later, and even rent back to the seller if need be, you just might end up with the house you want. Flexibility is key to submitting a winning offer, so make sure you have a Plan B – a place to stay for a few days or longer if you’re going to be between houses, and a mover/storage option squared away.

Look in adjacent neighborhoods

Yeah, you have your heart set on a specific neighborhood. But if it’s just not happening, consider the next neighborhood over. Experts say they have great potential upside.

Consider the worst house on the block

Buying the ugly duckling is a top strategy for investors, and one that can get buyers in the door (literally!) if they’re having trouble purchasing move-in-ready homes. “When your budget as a first-time buyer doesn’t stretch to a house in perfect condition in a neighborhood you adore, you might consider buying a home that needs work. Or maybe you’ve watched fixer-upper TV shows and think you could handle sweat equity. Either way, real estate experts say buying a house that needs renovating can make sense as long as you are realistic about the process,” said the Washington Post. “A fixer-upper can be a smart investment, particularly if you can buy a property under market value and then increase its value with the right projects. While some home buyers prefer move-in-ready homes, they are stuck with the choices the previous homeowner or builder picked for their countertops, fixtures and floors. Not only do buyers of fixer-uppers get to select their finishes, they also can make sure the work is done the way they want.”

If you’re worried about how you’re going to pay for all those renovations, ask your real estate agent or lender about a 203(k) loan, which rolls renovation funds into your mortgage. “An FHA 203k loan, (sometimes called a Rehab Loan or FHA Construction loan) allows you to finance not one, but two major items 1) the house itself, and; 2) needed/wanted repairs,” said The Mortgage Reports. “Because the lender tracks and verifies repairs, it is willing to approve a loan on a home it wouldn’t otherwise consider.”

The loan addresses a common problem when buying a fixer home: lenders often don’t approve loans for homes in need of major repairs.”

Waive contingencies before you submit your offer?

Note the question mark. Your real estate professional may caution you against this strategy. But, lenders like Better Mortgage are making it work with a program that “allows buyers in select markets to not only underwrite their finances, but also get the appraised value of their home before they submit an offer. That means they have the option to waive both financing and appraisal contingencies to make their offer as competitive as cash.”

 


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What N.J. needs: More downtowns for millennials (and boomers)

What N.J. needs: More downtowns for millennials (and boomers)

Reposted from Philly.com

When at last they are able to leave the nest for good, New Jersey’s millennials are likely to head downtown — or up and out of the Garden State altogether.

These are among the conclusions in a new report by New Jersey Future, a smart-growth advocacy organization that’s been studying our state’s evolution since 1987.

“People in the media were asserting that millennials and baby boomers wanted to move to town centers, and I got curious,” says the report’s author, Tim Evans, explaining the origins of the project.

“I generally don’t believe media hype until I can see the data.”

He found that the number of people between the ages of 22 and 34 fell in New Jersey between 2000 and 2013, from 1.48 million to 1.44 million. That 2.7 percent decline compares with a 6.8 percent increase in the size of the group nationally during that time — and came about despite the fact that the percentage of millennials living with their parents is higher in New Jersey, at 47 percent,  than in any other state.

“That’s a pretty powerful piece of evidence that many [millennials] simply can’t afford to get their own place” in the state,  Evans says.

Like their peers elsewhere, he notes, New Jersey millennials who are living independently do indeed love living in dense, walkable town centers with good transit connections to big cities.

The percentage of millennials in the population of these communities tends to exceed the statewide average of 16.4 percent; Hoboken has become New Jersey’s most powerful millennial magnet, with 45 percent of its population between the ages of 22 and 34.

Evans also found that boomers (my people!) aren’t generally heading to the Hobokens of New Jersey. They are rather more apt to age in place in the big house, big lot, car-centric suburbs where they raised their kids, or moving to one of the vast over-55 communities — often isolated on the suburban fringe — cropping up statewide.

About these worrisome phenomena, more in a moment.

But first, the “New Jersey is losing millennials!” headlines the NJ Future report has generated.

“The report has a pop culture hook,” notes Evans, who has worked for NJ Future since 1999 and serves as its research director.

The report also has been preceded by several years of sporadic stories about one or another group  “fleeing” what some have dubbed the “most abandoned” state (along with New York and Connecticut), mainly due to property and/or other taxes.

Wall Street worthies, retiring boomers, and recent college graduates who may account for some of those departing millennials are among those whom various publications have described as hightailing it out of Jersey.

All of which might be entertaining in a late-night-punchline sort of way, were it not for the fact that Evans’ report is about challenges facing a state that’s home to 8.9 million people. Me included.

“It matters … if you care about the next generation of people being able to live here,” he notes, adding, “Housing being too expensive is probably the biggest factor preventing New Jersey from being able to retain our millennials.”

The report “confirms everything we already knew — that there are places where people in general, and not just millennials, want to live. But [the availability of] these places is limited,” says Westmont resident Jason Miller, who helped found the South Jersey Urbanists group.

Nevertheless, in Haddon Township, which includes Westmont, the millennial population is on the rise, from 14.8 percent of the population in 2000 to 16.8 in 2013.

“There’s a wave,” says Miller. “The whole Haddon Avenue corridor has just the right mix of things people are looking for … one of the better commuter lines, good schools, and houses with backyards.”

Like Westmont, other South Jersey communities possess the density, walkability, and transit access that draw young people, Evans notes. These include Collingswood, also in the Haddon Avenue/PATCO corridor; the Burlington County RiverLine towns, and Woodbury/Pitman/Glassboro, where the long-planned Gloucester County line may (let’s hope) eventually be built.

But even in municipalities with attractive downtowns, leafy streets, and similar amenities, such as Moorestown, senior citizens — whose ranks now include the oldest boomers — often find it difficult to get around, says Trudi Herman. She founded the all-volunteer It Takes a Village NJ organization to offer transportation and other assistance; it currently serves about 60 Burlington County residents.

“Buses are on the periphery, and taxis are too expensive,” Herman says. “People can’t get to the doctor or get groceries, or [participate in] the community. They need that.”

And many older residents are reluctant or can’t afford to sell long-paid-off homes, she adds.

The NJ Future report urges the state to encourage the development of a range of housing types, and the creation of new downtowns around existing shopping centers, as has been done in Voorhees and Somerdale.

Despite the high costs, New Jersey “is blessed with a lot of the kinds of places that the younger workforce is looking for,” says Evans, who’s 50 and lives in the Philly suburbs. “If I were a millennial, I would be taking a serious look at New Jersey.”

Joe Russell grew up in South Jersey and moved to Collingswood from the Boston area in 2012.

He and his wife “walk downtown, walk to the train, and ride our bikes everywhere,” Joe, 33, says. “There’s a mix of people, a variety of people, and that’s one of the things that’s important to us.”

 


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