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7 Things New Home Buyers Wish They Had Known

7 Things New Home Buyers Wish They Had Known

There are certain things many new home buyers wish they had known before buying. The problem is, you don’t know what you don’t know, and these are not things you’re going to want to learn the hard way.

Because a home is such a large purchase and commitment, sometimes decisions made – or not made – during the buying process can cause short-term stress or make the process more complicated, while others may even have long-term effects.

To make your home buying process successful, look at these seven things new home buyers wish they had known. Do your best to build them into your home buying process, and you’ll go into the experience feeling well-equipped and excited.

1. You may need more money than just the down payment

People often save for several years to buy a home. Their target amount is usually the down payment. For example, if you expect to purchase a $200,000 home with a 5% down payment, your savings goal will be $10,000. But that may not be all you need! There are several other potential financial requirements you may need to save up for.

  1. Closing costs. These can range between 2% and 4% of the mortgage amount. In some markets, these are customarily paid by the seller, but if that’s not the case in your market, you’ll have to come up with the additional funds.
  2. Prepaid expenses. These are escrows for property taxes and insurance. Depending upon the escrow requirements in the community, these can be anywhere from several hundred to several thousand dollars.
  3. Cash reserves. These are required on some loan programs, but not all. They’re based on the new monthly house payment. For example, if the requirement is for “two months cash reserves” you will have to show that additional savings equal to two months of the new house payment will be available after closing on the home.

If you’re simply saving for the down payment, you may find you don’t have enough to close. That could set you on a mad scramble at the last minute, coming up with money to cover other expenses.

One other possibility, at least regarding closing costs, is what’s known as premium pricing. With this strategy, the lender pays your closing costs in exchange for a slightly higher interest rate on the loan. If this is an option you’d like to pursue, you should discuss it with your loan originator very early in the process.

2. It’s best to clean up your credit before you apply for a mortgage

A comparison chart from myFico.com shows the effect your credit score has on the interest rate you’ll pay on your mortgage. For example, a credit score of 760 or higher may get you a rate of 4.068% on a 30-year mortgage.* By contrast, a score of 690 would get you a rate of 4.467%.* On a $200,000 loan, the monthly payment at 4.068% would be $963. On a $200,000 loan, the monthly payment at 4.467% would be $1,009.**

That’s a difference of “only” $46. But on a 30-year loan, that’s $16,560!

You can increase your chances of securing a lower rate by cleaning up your credit before you apply for a mortgage. Don’t wait until after you apply to get this going. It can take months to increase your credit score, particularly if your score is especially low.

3. A mortgage pre-approval isn’t a final approval

There’s a world of difference between a mortgage pre-approval and final approval. Typically, a pre-approval has conditions. In a final approval, all conditions have been cleared, and you’re ready to close.

Virtually everyone who applies for a mortgage starts out with a pre-approval, but it’s important to understand that pre-approval is the beginning of the process and not a final decision.

If your pre-approval has conditions, and it almost certainly will, you’ll need to clear those conditions before closing. In fact, the sooner those conditions are cleared, the more stress-free the home buying process will be.

Examples of conditions include paying off a certain debt or obligation, providing evidence of additional income, satisfying documentation requirements for a gift, or even selling your current home.

Since many of these conditions require time to complete, it’s best you get working on them as soon as you get your pre-approval. A “clean approval,” which is one with no major conditions, is an excellent bargaining chip when you’re negotiating the price of a property you want to purchase.

4. You won’t necessarily save money buying without a real estate agent

Do you want to know a secret? The buyer doesn’t pay the real estate commission – the seller does.

Translation: you won’t save money buying without a real estate agent. You’ll only be helping the seller to save money on the transaction.

What’s more, since real estate agents help buyers find homes and negotiate contracts, you’ll be giving up a valuable ally in the home buying process.

As a buyer, you should always work with a competent real estate agent.

5. Dual closings work better in theory than in reality

In some markets, it’s common for buyers to work out a “dual closing.” That’s when you attempt to close on the sale of your old home on the same day you close on the purchase of the new one.

In theory, it’s perfect. You leave one closing, then go to the next, and get it all done in one day. What’s more, you don’t have to do the dreaded double move – you can load the truck at your old house, and make an immediate move to the new one.

The reality is that a single real estate transaction is a fairly complicated ordeal. Trying to engineer two closings on the same day can turn into a nightmare. Picture this – you’re all set to do your dual closing, but you find out the day before that the buyer of your old home has had a glitch and can’t close. Now what? Your perfect scenario has been torpedoed by circumstances completely beyond your control.

A better option, if you can make it happen, is to close on your old home with a rent-back provision. That’s where you continue to live in the home for at least a few days after the closing. During that time, you close on the purchase of the new home, then make a single move. That will separate the two transactions and ensure that the sale of your old home is complete before the closing on the new one.

6. Never, ever, neglect a home inspection

Some home buyers neglect a home inspection so they can save a few hundred dollars. Other times, real estate agents discourage the practice. They don’t want to risk the possibility that the discovery of a problem could cause the sale to collapse.

But the money you pay for a home inspection might be the very best money you spend in the entire home buying process. A thorough home inspection will alert you to the exact condition of the property. More important, it will give you an opportunity to identify significant flaws in the home, then negotiate to have the seller make repairs before closing.

Neglect this step, or ignore the results of the inspection, and you could end up paying thousands of dollars after the closing. After all, once you close, the repairs will be solely your responsibility. A home inspection is an opportunity to avoid that outcome.

7. Buying less house than you can afford will keep you from being house poor

It’s common for buyers to buy at the top end of their range of affordability. They may do this with the expectation that their financial situation will grow to match or overcome the high cost of the property. That doesn’t always happen. Sometimes expected promotions and career paths don’t pan out. When that happens, that $2,000 a month payment you could barely afford after closing becomes a permanent problem.

You may have the house of your dreams, but you won’t have much else. The days of going out to dinner or the movies might be gone, and the annual summer vacation could go right out the window – not to mention an inability to save money for emergencies and long-term planning.

This creates a condition known as being house poor. You love your house, but there’s not much money left over for anything else. It’s better to buy a little bit beneath your maximum capability. That will leave extra room in your budget to take care of all the other things in your life that aren’t related to your home.

If you’re looking to buy a home soon, think of this list of seven things new home buyers wish they had known as your guide. Refer to it before and during the home buying process so your plan can go as smoothly as possible. Your future self will be glad you did.

This is for informational purposes only. This is not intended as legal or financial advice.

*https://www.myfico.com/credit-education/calculators/loan-savings-calculator/

**The interest rate given to an applicant will depend on a variety of personal factors including but not limited to, credit history, type of loan and current market rates.