By Rohit Kothare on May 21, 2019 11:02:10 AM
With millions of options and rising home prices, finding an affordable home can be daunting for anyone. Moreover, home buying exercise doesn’t just stop at finding the right place. The right mortgage also plays a crucial role. However, with proper financing in order, you can make your loan process as easy as possible.
Financing may include your credit history and credit score, debt-to-income ratio and the overall financial picture comprising your previous loans, bills, taxes, salary slips, asset documents, etc.
Proper finances convince a lender that you’re creditworthy to borrow money.
Many first-time buyers tend to take several missteps in home-buying processes. So if you are also in search of a new home, read along to know the common first time home buyer mistakes so you can avoid them!
1. Starting the Home Search before getting Pre-approved for a Loan
Pre-approval is an essential step in the home buying process. First, it gives you a price range then it also serves as a solution to property filtration. With pre-approval on loan, you can hone your list of potential properties and dig into the search. Plus, being pre-approved for your loan also sets you apart from other buyers and gives sellers confidence in your offers.
2. Not Keeping Tabs on Your Credit
A history of late payments or significant debts will increase interest rates or even chances of denial on your loan application. So, keep a continuous track of your credit report yearly.
You can also boost your score by paying your bills on time, making more than the minimum monthly payments on debts and not maxing out your available credit. Above all, be patient; it takes more than a year to improve your credit score.
3. Minimizing Downpayment
The down payment of a home is the amount which a home loan does not cover. You can pay as low as 3.5% of total property value as a down payment (depending on the real estate developer). However, the less you pay beforehand, the more your loan + interest generates.
So, it is always advised to pay more in down payment. With a higher down payment, savings on interest component will be more as the amount you have paid in down payment is free from interest payment.
4. Not Buying the Right Loan Coverage
Let’s suppose the borrower faces an unforeseen contingency, illness, death, accident or any tragedy that leads to permanent disability to pay the loan EMIs. Then, loan insurance will protect the family of the loan borrower. A home loan is a long-term financial responsibility and should be dealt with the utmost attention. Hence, choosing the right cover becomes a necessity.
5. Not Comparing the Loan Estimate to the Closing Disclosure
Banks or NBFCs are required by law to provide you with the closing disclosure three business days before your closing date. This document lists the exact costs you’re expected to pay at closing, including your down payment, closing costs, loan details and terms, and other relevant information. Often the first-time home buyers ignore this document and suffer from an unexpected rise in prices.
6. Not Checking the Eligibility
A home loan applicant has to fulfil all the eligibility criteria prescribed by the Banks and NBFCs to avail a home loan. In case you don’t match the eligibility criteria, your application will be rejected, and a rejected loan application can become the reason behind further rejections as well. So it is advised to check the loan eligibility before applying for the loan.
Related Post - Who qualifies as a first time home buyer?
7. Failing to Avail First Time Home Buyer Benefits
According to recent change in tax rates, the government has reportedly cut GST rate from 12% to 8% for houses purchased using the credit-linked subsidy scheme (CLSS) under Pradhan Mantri Awas Yojna.
Plus, the first-time home buyer can also avail benefits like deduction in taxes, deduction on GST, deduction on subsidy slabs, deduction on interest in the home buying process.
Related Post - How to Save Tax on Real Estate Investment?
8. Talking to Only One Lender
The right financial institution will look at your loan application and diagnose any potential roadblocks ahead to give you a clear understanding of your home-buying options. Moreover, to find the best suitable lender, an extraneous search is mandatory. Compare rates, lender fees and loan terms with a number of banks or financial institutions and make an informed decision.
9. Ignoring the Neighbourhood and Locality
The goal is to find you and your family a place where the culture and values of the (area) match yours. You can always add a third bathroom or renovate balcony. Having, an active lifestyle and amenities to suit your lifestyle also take essential pieces in your consideration pie.
So, ask your real estate agent to help you gain insights on:
- Neighbourhood safety & security
- Water & electricity supply
- School reviews for your kids
- Accessibility to emergency services and overall liveability
- Measure proximity to your workplace/office and hospitals
- Visit the neighbourhood at different times to get a sense of traffic, population and pollution levels.
- Interact with existing residents to get an idea of the overall vibe of the location
10. Underestimating the Cost of Renovation, Taxes, and Brokerage
You might have found your dream home, but an empty house can never become a home. Hence, upgradations like - furniture, painting, brushing, etc. can increase your overall cost. So don’t forget to consider such upgrades and list them down on your personal schedule (Meaning the point in time when you plan to pay for them after buying the home).
And, finally coming to the big one!
11. Buying a Home that’s way out of your Budget
Stretching your monthly budget to cover your mortgage might also mean you can’t save up for an emergency or those house repairs, and this will eat up your cash at hand. This will also affect your other financial goals and set them tumbling in the wrong direction.
Hence, don’t fixate on the maximum loan amount for which you’re approved, but on whether you can afford the monthly mortgage payment at that price point. First-time homebuyers should always be extra cautious and buy a home that’s truly within their budget.
There you have it, a list of 11 common mistakes to avoid when buying your first home. Keep these in check, find your perfect family home and as we at Kohinoor say - “Sada Sukhi Raho”