This week on the Bullpen we sit down with Spencer Patel, the “Real Estate Wiz” of the Lauer Group as he shares with us a bit about some common pitfalls that may happen to first-time home buyers or sellers as they go through this complicated process
Buying a home is one of the most significant financial commitments most people make in their adult lives. As you enter into it for the first time, it can seem highly intimidating and daunting. With so much conflicting advice and the real estate market evolving daily, it can be so easy to make missteps that can cost thousands of dollars! The importance of having a great realtor in your corner has never been more important. Luckily for first-time homebuyers, Mentoro has brought Spencer Patel into the studio to give some helpful tips to help overcome the biggest pitfalls in purchasing a home.
Not Being Financially Prepared
What does it mean to be financially prepared to buy a home? Many people struggle with regrets after purchasing their home, often due to their lack of preparation and unforeseen costs and complications. One study by Clever Real Estate recently confirmed that 58% of recent homebuyers believed they overspent on their mortgage and are struggling to keep up with the payments. Before making the jump to put an offer on a home, there are a few key steps that can help save you money in the long run.
A particularly crucial factor in preparing to buy a home is getting your credit score in a place where it leads to a favorable interest rate. For different types of loans, there are different thresholds that are required, but it is a good idea to boost your credit score as much as possible before buying a home. Spencer suggests aiming for 580-620 at a minimum. Another essential element to consider is your DTI ratio (debt to income). This ratio represents the amount of debt that you have relative to your income. Spencer recommended trying to stay between a 20-40% DTI ratio if possible. Keep in mind, this includes car payments, student loans, credit card and any other debt you have. He recommended paying down your debt, especially high interest debt, while saving for a home, as this will have a substantial impact on the interest rate on your loan.
Table 1.1 See common loan options and the requirements
One thing many people forget about when purchasing a home is all the extra costs associated outside of the down payment. Make sure you don’t forget about the cost of inspections, closing costs, appraisals and moving costs when budgeting for buying a home. Spencer suggested having a minimum of 6% of your purchase price saved to offset these extra costs over and above the cost of the down payment. In addition to this, Spencer spoke about how it may be a good idea to keep a “rainy day fund” of around $4,000-$5,000 in case you have any surprise home emergencies after move-in day. Good news, a home warranty can often cover large repairs within the first year of owning a home and can provide peace of mind while you are building your savings back up after purchasing a home.
Shopping your pre-approval amount, not your budget
After you are close to reaching your preparation goals for buying a home and have your credit score, DTI, and savings in a place you feel comfortable with, it’s time to get pre-approved! Gather your documents, complete an application and your lender can walk you through the process of getting started with the process of looking for a home. One common mistake that prospective homeowners make in their search process is shopping within their preapproval amount rather than their actual budget for monthly payments. Owning a home is a huge step in increasing your wealth, but there is a real danger in becoming “house poor.” This occurs when you spend a high percentage of your monthly budget on mortgage payments. People who are “house poor” tend to struggle with other financial obligations like debt and other expenses. As we talk about in other areas of personal finance, it is important to live within your means rather than living beyond them. This choice starts in the shopping process, not just in the purchase process. It is important to shop within your budget, so you don’t fall in love with a home that is far outside of your ability to own.
Making Big Purchases or Deposits before Closing
Another mistake that many people make as they are going through this process is making large purchases on credit before closing on their home. When you are moving, it can be natural to go ahead and take advantage of a limited time sale on a fridge before you close on your house, but this decision could actually prevent the loan from being approved. Spencer recommended putting off large purchases for a year before buying a home if possible. Lending institutions are very skeptical of borrowers who make many large purchases at once on credit, so it is important to focus on the home first, and wait to buy appliances, cars, or other large purchases once you finalize your home decision. Spencer shared that he has personally seen several deals fall through at the last minute due to this tragic but innocuous mistake. However, if you are able to purchase the item in cash and still have enough for your home, that is a much safer option. The main problem arises when you put a large purchase on credit or sign an agreement to do a payment plan.
Speaking of cash, another little-known mistake that people may make is making a large deposit into their bank account(s) in the months leading up to the purchase of their home. To clarify, this does not mean you cannot receive a cash gift or something the bank can track, this would be random deposits that the lender cannot trace. For example, if you have a few thousand dollars in a coffee can that you decide to deposit right before you are approved, this can be enough reason for the bank to reject your application. Spencer recommended communicating with your lender as much as possible for any unusual financial activity in the months leading up to your home purchase to ensure they have as much information as possible to approve your loan.
A home inspection is vitally important for understanding the underlying issues with your home that may not have been apparent from the seller’s report. It is your guarantee that you are getting what you are paying for. Often, because of the cost associated with a proper inspection or during the midst of a competitive bidding war, it can be tempting to skip this step, but this can be a huge mistake. The inspection acts as a protection for the buyer and lender and can even lead to significant savings in the negotiation of the home price if there are core issues discovered during the inspection. Spencer said that it may be ok to skip inspection if you are able to attain a very recent inspection, but he recommended being very hesitant to skip this step because it is better to be safe than sorry in most cases!
Buying a home is one of the most exciting steps in your financial journey. Don’t fall into these common mistakes that are easy to make and meet with your Money Mentor to make sure you are financially prepared to take this step. Want to learn more about Spencer Patel at the Lauer Group? Follow him on his Instagram to catch the latest updates. Mentoro can help you figure out how to reach your financial goals and walk into every stage of your life with confidence. Meet with your Mentor today to get started!