The housing market is still going strong and millennials are a big factor.
Total mortgage application volume surged 25.5 percent on a seasonally adjusted basis for the week ending Oct. 2 compared to the previous week, according to the Mortgage Bankers Association. Applications to refinance and to purchase homes are now at the highest level in five years.
Millennials represent the largest share of homebuyers, according to an analysis by the National Association of Realtors. Nearly one-third of all homebuyers, and 68 percent of first-time buyers, were 34 or younger last year. (Tweet This) And those numbers are expected to grow.
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Buying your first home or know someone who is? Here are three common, and potentially costly, mistakes to avoid.
Mistake #1: Overestimating what you can afford.
Real estate brokers say first-time buyers often focus on the down payment and monthly mortgage amount when calculating how much they can afford and forget to factor in closing and other costs.
“They get to the closing and they’re shocked by the amount of money they have to pay,” said Vicki Fillet, certified financial planner and president at Blueprint Financial Planning in Hoboken, New Jersey.
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It’s important to remember too that monthly payments include not just the mortgage, but interest, taxes and insurance—something that buyers can often forget when figuring out their budgets.
It’s a good idea to get pre-approved for a mortgage loan so you know how much a bank is willing to lend you before you make an offer on a home. But keep in mind that the amount you’re pre-approved to borrow from a mortgage lender may be more than you can actually afford once you factor in taxes, insurance and other costs like condo or homeowners’ association fees and maintenance.
As a general guideline, your total monthly payment (including mortgage principal, interest, real estate taxes and homeowners insurance) shouldn’t exceed 28 percent of your gross, or pretax, income.
While some sellers are still asking for 20 percent down payments, it’s possible to pay much less. Mortgage giants Fannie Mae and Freddie Mac announced guidelines late last year for loans with down payments as low as 3 percent under a new program largely aimed at first-time homebuyers. Just remember that the lower your down payment, the bigger your mortgage loan (and the more you’ll pay in interest).
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Mistake #2: Letting your emotions get the best of you.
Don’t get so attached that you buy with your heart and not your head. “It’s difficult not to get emotionally attached. Homeownership is an investment in your future,” said Chris Polychron, president of the National Association of Realtors.
But be careful. Get too emotionally attached and it can set you up to spend more than you can afford.
Cathy Moyano of Coccia Realty in Kearny, New Jersey, recommends prioritizing what you want in your home. Make a list of the most important qualities, whether you want a certain school district, updated bathrooms, a backyard, etc. Then figure out what you aren’t willing to give up. You won’t find the perfect home that meets your entire list so narrowing it down to what matters most can help you through your search process.
Mistake #3: Not planning ahead.
Once you’ve narrowed the search and you are ready to make on offer, check with your agent about the demand. Is the home getting multiple offers? Has it sat on the market a long time? Will it require a lot of upgrades?
Make sure you get a thorough inspection. Fillet said buyers often don’t get an inspector with expertise to check the pipes, the plumbing, or air conditioning. You want someone who knows what they are doing, not just an inspector from the real estate broker, she said.
Remember the resale opportunities. Consider the school district, Fillet said, because even if you don’t have children or plan on having any, the next buyer might.
Don’t overly improve the property either or “over customize to your personal taste,” Moyano said. “Let’s say you’ve painted your dining room purple, before you sell it, paint it back to a neutral color. This sounds like a little thing, but it does leave an impact on when you’re showing homes.”