Buying a house is exciting, but it can also be tiresome. There are plenty of steps involved between saving a deposit and finally moving into your own home – and there’s also plenty of advice available on what you should do to get things right. However, not many people talk about what can go wrong, or the common mistakes that home buyers tend to make, and what you can do to avoid them.
Here are six pitfalls you want to avoid as a first home buyer:
1. Not knowing your credit score
Your credit score is an important figure that determines the fate of your home loan application. Lenders consider borrowers with high credit scores less likely to default on their home loans. Therefore, they prefer to work with borrowers with high credit scores and reserve their best rates and discounts for them. If your credit score is good, you can expect to find a competitive rate on your mortgage. However, a low credit score could lead to your application getting rejected, or you might be charged a higher interest rate.
It’s generally advisable to check your credit score regularly, especially before applying for a home loan. If your credit score is less than satisfactory, you can take steps to improve it before filing your home loan application. You should also order a copy of your credit report from each of the three credit reporting agencies to check if there’s any incorrect information listed on your file. If you find any error, dispute it immediately to have it removed from your file.
2. Searching for a house without getting pre-approved for a loan
Getting pre-approved for a home loan isn’t a mandatory step on your home loan journey. However, it is certainly helpful.
Think of a situation where you like a house and put down a deposit on it. But what if your home loan gets rejected for some reason? You risk having your deposit forfeited in that case. While a pre-approval doesn’t guarantee your home loan will get approved, it does increase the likelihood of your mortgage application going through.
Lenders grant you a pre-approval only after analysing your income and other financial responsibilities. Therefore, if your loan is pre-approved, you are more likely to get the final approval, unless your financial situation changes or your property doesn’t meet the lender’s criteria. Being pre-approved also gives you an estimate of how much money you might be able to borrow – helping you to narrow down your property search.
3. Borrowing more than you can afford to repay
The amount of money you can borrow for a house is known as your borrowing capacity. Each lender might use a slightly different formula to calculate your borrowing capacity, but they all consider some common factors. These include your income, living expenses, and any debts on your file, including your credit card limits. Based on these factors, lenders decide on the maximum amount they are willing to lend to you that they think you can comfortably service. Most lenders feature borrowing capacity calculators on their websites, which you can use to estimate this figure.
While checking your borrowing capacity is good, it’s also important to understand that your borrowing capacity and home loan affordability might differ.
Just because a lender thinks you can borrow a certain amount doesn’t mean you can automatically afford it. Instead, use a repayment calculator to check your monthly repayments for different loan sizes to determine the maximum amount you can comfortably repay.
4. Ignoring the additional costs
When buying a house, the initial deposit isn’t the only cost you need to consider. Besides the money you put down as a deposit, you’ll need at least 5% of the purchase price to cover additional costs, including:
- Stamp duty
- Conveyancing fees
- Building and pest inspections
- Bank fees and charges
- Home insurance
Apart from your deposit, one of the most significant costs you’ll pay is the stamp duty on your purchase. Luckily, some states and territories offer stamp duty concessions to first-home buyers, and you can visit your local state or territory government website for more information.
5. Avoiding property inspections
It’s easy to judge a book by its cover, but experts recommend scratching beneath the surface by ordering a property inspection report before paying a deposit on a house.
Properties can often come with structural defects or other issues that may not be visible to the naked eye. A professional can help pinpoint issues such as electrical or plumbing defects, pest infestations, and cracks in walls or roof lines that can cost you a lot to fix in the long run. It’s therefore advisable to hire a property inspector and have the house properly surveyed before you set your heart and money on it.
6. Choosing the wrong home loan
It might be confusing to understand the different types of home loans, but it’s important to know and compare your options to get the best possible deal on your purchase. One of the first things you need to decide when taking out a home loan is whether you want to pay a fixed or a variable rate.
A fixed-rate home loan will allow you to ‘fix’ your interest rate for up to five years. Your interest rate will not change during this time, and you’ll continue making the same monthly repayments, irrespective of any interest rate changes in the market. On the other hand, the interest on a variable rate home loan changes with the market, and it could either go up or down, with consequent changes in your monthly home loan repayment.
In addition to deciding on the type of loan you need, it’s also worth comparing home loan deals from different lenders to get the best possible rate and features. Some home loans might cost a little extra but come with handy features, such as a mortgage offset account or additional repayment and redraw facilities, which can help you save money in interest and make your home loan more manageable.
It helps to understand how these features can be useful for you and whether you need them in your home loan. If you feel overwhelmed by the information, you can consider speaking to a mortgage broker to get impartial advice on finding the most suitable home loan for your situation.
