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What to Look Out for When You Buy a House

Mistakes to be Mindful of When Looking for a Home

Blurry Picture of a Home.

Shopping for a new home can be an exciting but somewhat daunting experience. The amount of information you need to know can be mind-boggling. Basic concepts such as how you plan to finance your home, where to look for the best mortgage, and your credit score are just a few of the things on your must-know list. Combine these important factors with your personal preferences regarding size, neighborhoods, school districts, and the cost of buying a home and you have a multitude of things to consider. It is helpful to be mindful of the mistakes that plague many buyers when looking for a home.

Not Considering Family or Career Changes

When considering if it makes more sense to rent or buy, the decision is as much about wanting emotional and life stability as it is a strictly financial decision.

When you buy a home it is not just a commitment for your current situation, but a commitment for years or decades to come.

As your life, career and family change so will your goals and desires.

  • Will you have children? How many?
  • Are local public schools great?
  • If one parent quit work for the kids is one income enough?
  • How important is it to be close to your parents?
  • Might your parents want to move in with you?
  • How stable is your income?
  • Is your employer likely to require you to move?
  • How diversified is the local economy?
  • If you had to change employer to live locally could you?
  • How long will your commute to work be?
  • Are broadband and space sufficient to work from home?

Family Situation & Employment Changes

Are you likely to have kids soon? If so, a somewhat cramped place may soon become unbearable if you work from home.

Children are a blessing but they also mean many additional obligations. Raising kids correctly takes up a lot of time, focus, attention and love.

Do you or your spouse have a job that may require you to move like a military post change? If you have these risks in place what is your plan for how to deal with them when the risk is realized? Can one parent earn enough to support the household? Are you able to make things work financially and emotionally? If either of you get laid off will you still be able to make the mortgage payments?

Living near parents can mean a helping hand and mini-vacations from children that drain you and strain your relationship with your spouse. But grandparents who put their grandchildren first may also be in need of financial support, or they may even want to move in with you or stay for extended periods of time.

Preparing Your Finances for a Big Purchase

Down Payment Savings

The average American home buyer puts around 10% down when they buy a home, though 20% is considered an ideal benchmark because it removes private mortgage insurance requirements.

The High Cost of a Low Downpayment

If you do not have a large downpayment saved then you may pay more 3 different ways:

  • Larger Loan Size: A larger loan means you will pay greater interest over the duration of the loan.
  • Higher Interest Rates: Borrowers who do not have much money to put down on their home are typically quoted higher interest rates on their loan.
  • Private Mortgage Insurance: Conventional loans which have less than 20% down typically are required to carry PMI until the loan-to-value (LTV) reaches 78% as you pay the loan down. PMI costs 0.5% to 2% of the loan amount annually. If you borrowed $250,000 to buy a home this could add $104 to $416 per month to your mortgage payment.

Not Knowing Your Credit Score

Every purchase you make using credit contributes to your credit score. The timeliness of your payments is very important, but it is not the only thing that adds to your score. How much credit you have available, what the ratio of debt to income is, and even the amount of inquiries into your credit can have an effect on your numbers. It is important to know what your credit score is before you even start looking for a house. The higher your score, the higher your likelihood of being approved for a mortgage, and the better your mortgage rate will be. Those with higher credit scores typically get lower interest rates on any purchase. Knowing your credit score before looking for a home will help you plan the best financial time to make a purchase.

Get a Free Copy of Your Credit Report

By law you are allowed to receive a free copy of your credit report from the major credit reporting agencies annually. Some URLs with the word "free" in them are not actually free. The official resource for getting your free Equifax, Experian, and TransUnion credit reports is AnnualCreditReport.com.

You should aim to fix any credit issues at least a year before planning to buy a home in case you discover any outstanding issues in your research like identity theft. If you are a victim of identity theft and you report the fraud to the credit reporting agencies directly they may not do anything which helps you resolve the issue. If a debt collector is harassing you for someone else's debt you can get fast results by filing a complaint with the CFPB.

Prequalify

Lenders like borrowers who have stable employment history and have a low debt to income ratio to ensure they will be able to repay their mortgage.

Unsure What You Qualify For?

It is frustrating to find your dream home only to later discover it would be beyond your budget. We provide mortgage qualification calculators ranging from rental equivalent payment, minimum required income to home affordability.

In addition to meeting DTI requirements, lenders like low-risk borrowers who have a decent down payment and sufficient capital to cover their closing costs and have at least 3 to 6 months mortgage reserves.

Financial Considerations With Your Mortgage

Speciality Finance Products

Take the time to explore all of the finance opportunities available to you. A traditional mortgage works for many people but is not always the most effective choice you can make. Veterans, first-time home-buyers, people purchasing in depressed areas, and people buying homes that need improvements can all find additional options to finance their new home at both the state and federal level. There are also a variety of nontraditional mortgage options available. Do your homework and know what you are eligible for. If you have all of the information before you start looking for a home, you will save money and be able to make a better decision.

At a minimum you should know:

  • FHA Loans - good option for first-time homebuyers with little money to put down. Buyers can put as little as 3.5% down.
  • USDA Loans - can offer low or no downpayment loans to rural home buyers
  • VA Loans - can offer active duty military members and military veterans as well as their spouses low-rate loans with no downpayment

Fixed Versus Adjustable Rates

Most home buyers lock in their interest rates for the duration of the loan using a fixed-rate conventional 30-year mortgage. ARM loans may offer slightly lower initial interest rates, but both interest rates and monthly payments can jump sharply when the introductory teaser rate period ends.

Are You Unsure of Which Loan Structure You Should Use?

We provide free online calculators to compare fixed versus ARM loans and loans with different durations.

Current Fairfield Mortgage Rates

For your convenience the following table lists Fairfield mortgage rates.

Inadequate Neighborhood & Home Research

Failing to Know the Neighborhood

There are so many things to consider when looking for your home that it is easy to overlook some important factors. One of the biggest quality of life issues you should think about is the neighborhood you are looking at houses in. Don't take everything at face value. A neighborhood may look perfect, but you will want to dig a little deeper. Talk to some of the neighbors and ask questions about how long they have lived there and how they feel about the area. Ask the current homeowners why they are selling. Just remember that anything the seller tells you may be biased based on the fact that they want you to make an offer. Look to see where nearby green spaces and parks are located. Is the neighborhood close to stores, the library, the bike trail, or any number of things that are personally important to you? Don't underestimate the value of a great neighborhood.

Neighborhoods which have new parks and attractions added to them generally see home prices increase. If attractions and parks start closing then you can expect prices to decline on a relative basis.

Not Hiring a Qualified Agent

When looking for a home, many people attempt to forgo adding an agent to the mix. It is tempting, when you are making a purchase so large, to try to save money wherever you can. But trying to buy a home on your own can wind up costing you even more money in the long run. A good agent can do a lot of the leg work for you in tracking down the right house. They can also assist you in obtaining a mortgage, as they usually know the ins and outs of finance and home-buying. Hire a qualified agent and you will save time and quite possibly money as well.

Buying a Problem Home

Some old homes have major maintenance requirements which must be met to keep them safe. These additional expenses are on top of the other costs tied to homeownership including the monthly mortgage payments, property taxes, homeowners insurance, and in some cases HOA fees.

Homes in disrepair with major issues like a termite infection or structural problems may require a teardown which makes the land with home worth less than a nearby vacant lot which has already been zoned for residential use.

Not Considering Resale Value

The cost of your new home will have a great impact on you for many years to come. A large percentage of people who finance with a typical mortgage will be paying for 30 years if they stay in the house. However, most people do not purchase a home planning to live in it for the rest of their lives. You may have children, or your children may grow up and go out on their own. You may change jobs and need to relocate, or you might just wish to move to a new area. There are many reasons why people sell their homes and start over. Knowing the potential resale value of the home you are looking at should have a part in the decision that you are making. If property values are declining in the area, it may be hard to recoup your investment.

In addition, real estate is a relatively illiquid asset class with high transaction costs. You have to factor in Realtor commissions along with other significant transaction costs.

Too Much or Not Enough Caution

Approaching the process of buying a home with no sense of caution would be foolhardy. A home is a large investment of money and time and a decision that you will live with for a long time. You should approach it with caution, making sure that you are aware of every step of the process. But how much caution is the right amount? You don't want to dive in with both feet, never checking to see how deep the water is. Take the time to look at the facts, have inspections done, and listen to what your agent is telling you. Too much caution is the opposite end of the spectrum and just as big of a mistake. Trust your judgment and the wisdom of your agent. If you can't make a decision, maybe you aren't ready to buy a house. If it feels right, it is time to make an offer. If not, then it is time to move on.