When a potential buyer is ready to buy a house, it is important to be wary of the potential pitfalls of home buying.
1. Review your credit report several months before beginning your house search, allowing yourself time to verify its accuracy and dispute any errors prior to a mortgage lender checking your credit. Once every 12 months you can access a free copy of your credit report at annualcreditreport.com.
2. Keeping budget at the front of your mind, consider the 50/20/30 Rule, which breaks down like this:
- Fixed costs (rent or mortgage payments, utilities and car payments, monthly subscriptions – such as gym memberships and Netflix accounts) should total no more than 50% of your monthly take-home pay.
- 20% of your monthly take-home should be put toward important payments or contributions that will help secure your financial foundation, such as a retirement account, emergency fund or down payment on a future home.
- 30% of your take home pay is put toward flexible spendng, which encompasses meals away from home, household expenses, going to the movies, grocery purchases and the like. Having a budget to present to your lender provides them firm numbers on which to build your pre-approval.
3. Take added costs into consideration before making an offer. Inquire about current utility cost and property taxes. Request a homeowner’s insurance quote and budget approximately 1% of the purchase price for annual maintenance. Calculate closing costs with assistance from your realtor. After gathering all of that information, then run the numbers to determine if you can afford the home.
4. Yes, interest rates may be low and you may have found the “picture perfect” home, but if you have to borrow thousands more because you don’t have a huge nest egg or you have nowhere near a 20% down payment, it may not be the right time for you to purchase. You could avoid years of PMI and make a lower monthly payment if you alternatively spend the next year or two aggressively saving money toward a down payment.
5. Get everything in writing. Read, reread and review your contract with an attorney. If there is something on the property or in the home when you take a tour that you anticipate will be included in the purchase, make a point to include it in the written contract.
6. Ask your realtor for a list of local professional inspectors, and never skip inspections before closing on a house. Regrettably things don’t always go as planned during the home buying process. If a buyer finds a seller has not fulfilled their part of the agreement, there are courses of action they can consider, including placing repair money in escrow, reducing sale price and delaying the closing.
7. Always choose a realtor that you trust. It is extremely important that you feel confident your realtor is working for your best interest and not just to close a deal.