Buying your first house is both an exciting and scary process. When you sign on the dotted line, you are accepting responsibility for your largest financial asset and with that comes extra costs – home repair, maintenance and more. If you are a first-time homebuyer, there are several decisions that you make both in the pre-buying process and in those first few years of home ownership that can kill your credit. Make sure you have a plan for all of these scenarios so that your dream of home ownership doesn’t turn into a nightmare.
1. Buying at the top of your range – The mortgage lender pre-approved you for a $350,000 loan, that must mean that you can afford the payment on that loan, right? On paper the answer might be yes, but you need to sit down and crunch your own numbers to determine the max loan amount that you are comfortable accepting. There’s more to affording a home than simply being able to make the monthly mortgage payment.
2. Inadequate insurance – Now that you are a new homeowner, don’t scrimp on your insurance. Research your homeowner’s insurance policy so that you understand exactly what is covered and what requires supplemental riders or additional insurance. The last thing you want to deal with is a rare 500 year-flood and no flood insurance.
3. Home equity loans – Home equity loans were extremely common during the most recent housing bubble and although millions of homeowners learned their lessons, home equity loans are still available. Do not consider your house a revolving line of credit and open up a home equity line of credit or take out a second mortgage to pay off your unsecured debt. Inevitably, the credit card balances that were paid off with the second mortgage will start creeping back up and you will find yourself with more debt than you can manage.
4. Purchasing a rehab property – Unless you are on solid financial footing and have substantial savings, purchasing a property in need of a major rehabilitation or renovation is not a good idea for most first-time homebuyers. What happens when the funds run out and you have a partially renovated house? Your property will be worth less than you planned, which leaves you in a tricky financial situation.
5. Late payments – This one is obvious; don’t pay your mortgage late. While one late payment won’t lead to a foreclosure, at least not in typical situations, it will look bad on your credit. If you miss a mortgage payment, other creditors may become concerned about your ability to repay your loans. This could lead to higher interest rates on new lines of credit and even make it more difficult to obtain a new mortgage should you decide to refinance or move.