Many millennials start the home buying process without a real understanding of what it takes be a homeowner.
In fact many of them don’t even know the many upfront costs when buying a house — including coming up with a down payment, moving costs, closing costs, renovating costs, and so many others.
They think that if they have a sizable down payment and a stable job, the hard yards are over. Well, not quite…
Wondering how these mistakes can affect your overall financial plan? Talk to a local financial advisor.
That lack of knowledge can lead them to make costly mistakes, including paying thousands of dollars in loan interests, defaulting on their home loan, or going bankrupt. Here are some of the biggest mistakes millennials make when it comes to buying a house — and what can be done instead.
Check out: 5 Signs You’re Not Ready to Buy a House.
1. Not understanding the importance of a good credit score.
One of the most important things a mortgage lender looks at when deciding to pre-qualify or qualify you for a mortgage loan is your credit score.
Yet, many millennials don’t know the importance of maintaining a good credit score. Lacking that fundamental knowledge could cost them a lot. One is that you will have a hard to get qualified for a loan.
Second, even if a mortgage lender offers you a mortgage loan, you will likely get a high mortgage rate. A high mortgage rate can cost you thousands of dollars in interest – money that you could contribute towards your retirement savings.
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To avoid this mistakes when buying a house, millennials should first figure out their credit scores through a free monitoring service like MyFreeScoreNow. A good credit score is around 730.
Once you have an idea of what your credit score is through your credit report, take steps to improve it. One way to raise your credit score is not to max out your credit limit.
Maxing out your credit cards can hurt your credit score significantly. So keep your credit utilization rate under 30 percent.
Another way to improve your credit score is to pay your bills on time. Payment history accounts for 35% of your overall credit score. So it’s very important to pay your bills promptly.
Check out: How To Raise Your Credit Score to 850.
2. Not understanding how much down payment is enough.
A down payment on a house is the single most important factor when it comes to buying a house. Unless you are so wealthy that you can buy a house with outright cash, you will need to come up with a down payment.
The recommended down payment is 20% of the home purchase price. But many first time home buyers can be qualified for a FHA loan, where the down payment is 3.5%.
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However, the disadvantage of putting less than 20% is that you will have to pay Private Mortgage Insurance (PMI). A PMI is extra fee added to your monthly mortgage payment.
Another disadvantage is that it will take you longer to pay off your mortgage. And your monthly mortgage payments will be much more.
One way to not have to worry about a PMI is to save for a 20% down payment before starting the home buying process. Saving for a down payment should not be that hard if you have a savings strategy in place.
3. Not shopping around for multiple mortgage lenders.
Taking out a mortgage loan to purchase a house is the most expensive financial decisions you can ever make in your life. So it’s important to have the best mortgage rates possible so you don’t end up paying thousands of dollars in interest over the life of the loan.
Yet, most millennials only speak with one lender when buying a home. That is a big mistake. When you speak with one lender, you don’t know what other mortgage rates are available to you. A good mortgage rate means less interests. So not speaking with multiple lenders is one of the mistakes to avoid when buying a house.
4. Not knowing other upfront costs associated with buying a house
You might think that just because you’ve found a home and you have been approved for a loan, that your hard work is over. Well, not quite. In addition to coming up with a down payment, there are several other upfront costs when buying a house.
There are inspection costs. Before you buy a house, it’s always a good idea to inspect the house for defects. In fact, it is mandatory. Lenders will simply not offer you a loan unless they have seen an inspection report.
There are loan application fees. Some lenders may charge you a fee for applying for a loan. This fee typically covers tings like credit check for your credit score or appraisal.
There are repair costs. Unless your house is perfect from the very first time you occupy it, you will need to do some repair. Depending on the condition of the house, repair or renovating costs can be quite significant.
There are moving costs. Depending on how far you’re moving and/or how much stuff you have, you may be up for some moving costs.
So avoid these mistakes when buying a house, and your home-buying experience should go as smoothly as possible.
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