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. This 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.
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 find it challenging 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.
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.
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%. 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. 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 decision you can make. 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.
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.
Take these points into consideration when deciding if home ownership is on your radar. Happy House Hunting!