Buying your first home can often feel like an overwhelming experience. The amount of paperwork, the endless home tours, and online searches looking for just that perfect combination of style, space, and location, and the financial stress can be intimidating.
For those who choose to tackle the process, there are many rewards, including the building of equity that is necessary for financial stability.
However, what should be an exciting and exhilarating experience can often quickly turn sour, even to the point of causing financial headaches. If you are a first-time home buyer, it’s important to know, and be financially prepared for, not just buying a home, but maintaining and keeping a home.
Mortgage Payment vs. Cost of Ownership
Most experts agree that home ownership is nearly always preferable to renting. Why pay someone else’s mortgage, if you can be building your own equity?
However true this sentiment may be, potential home buyers need to understand what it means to be ready for the financial responsibility of owning a home. Many first-time buyers think that they have met the obligation if they can qualify for and obtain a mortgage to purchase a home.
The reality is that the mortgage is only part of the equation. Your lender may factor in taxes and homeowners’ insurance when calculating how much you can qualify for. But they usually do not look at other expenses: utilities, maintenance and repairs, desired renovations, potential future increase of homeowners’ association fees, etc. While in Virginia, your interest rate cannot increase on a fixed loan, taxes and insurance tend to go up every year. So without a slight increase in income, what may be a comfortable mortgage payment now may be a stress on the wallet in five years.
Informed and savvy first-time buyers will take the amount they are pre-approved for, factor in a budget or cushion each month for maintenance and utilities, ongoing fees, savings, and other costs (like childcare), then lower their price range accordingly. Don’t max out the pre-approved amount just because you can. You will regret it later, when you can’t afford to fix a leaky roof or replace appliances.
Keeping a Reserve
It can be tempting to lower your monthly mortgage costs by making a 20% down-payment and avoiding the added cost of Private Mortgage Insurance (PMI). This is the additional insurance the lender tacks on to a mortgage payment for those buyers who have smaller down payments. Don’t be fooled, though. The PMI protects the lender, not you.
If you can afford to put down 20% without completely depleting your savings, then go for it. But there is great risk in eliminating your slush fund in order to put more down on a home.
Most experts agree, it’s better to pay the PMI for a short period of time than to put yourself in a situation where you have no savings to fall back on if you lose a job, have an extended hospital stay or large medical bills, or other unforeseen circumstances. Unfortunately, these are often the very circumstances over which people lose their homes to foreclosure. It’s much better to preserve a slush fund. You can always get the PMI canceled later, once you build up your equity.
A quick note for veterans
If you are a qualifying Veteran of the US Armed Forces you have a fantastic loan at your fingertips with the VA Loan. While it may seem risky to purchase a home with zero down payment, just keep in mind the above items with your monthly budget. If you qualify AND keep your payment within your budget, then this option could be a fantastic one for you.
Another benefit of the VA loan is that the PMI is a one-time fee only. In addition, the fee can be rolled into the loan when you purchase a home, thus spreading it out over the entire term of your mortgage. Will a seller look negatively on zero down payment? If they have multiple offers in hand they may possibly go with one that has a large down payment, but that’s not guaranteed. After all, Northern Virginia is a military-friendly area and many sellers here love selling to veterans!
Buying Sprees before Closing
You’ve gotten pre-approved, you found the perfect house, now you have all this time to kill before closing. What should you do? Fill up the time with shopping, of course! I mean, after all, you need new furniture to fill your new space, right?
Wrong. First, you put your mortgage approval in jeopardy if you take out ANY new loans between the pre-approval and closing. Lenders will repeatedly check your credit up until closing, and they WILL see inquiries from new creditors or newly opened lines of credit.
Secondly, your lender will also be continually checking your cash for closing, and if you are dipping into your funds for your down-payment to make purchases, then you could put your mortgage at risk.
Why? Even if you can technically afford the increased monthly debt service PLUS your new mortgage, lenders will view this as risky behavior. It doesn’t make you look responsible with credit, and in these risk-averse times, this kind of behavior will send off serious alarm bells with your lender.
These are just three areas where new home buyers can get themselves into trouble when deciding it’s time to buy a home. What you don’t know CAN hurt you. We are here to help!
If you are thinking about buying or selling, now is still a good time to make your next move. We are here to help you every step of the way, and look forward to serving all your real estate needs. Check out our website to view current listings and important resources. If we can help you in any way, please contact us at 703-298- 7037 or email us at sandersnova@gmail.com.
