First-Time Home Buyer Mistakes: A Guide to Home Loan Decisions
May 28, 2024
Introduction
Buying your first home can be both exciting and confusing. You might wonder if you are making the right decision. If you are not familiar with the process, it can lead to mistakes that can have long-term financial implications, or prevent you from getting your dream home. Whether it's underestimating hidden costs, overlooking important details in the home buying process, or simply feeling overwhelmed by the number of options, the journey to homeownership can be overwhelming.
In this homebuyer’s guide, we will take you through types of home loans and common first-time homebuyer mistakes so that you can avoid these pitfalls.
Table of contents
- What is a home loan?
- Types of home loans available for first-time buyers
- 10 common mistakes first-time homebuyers make
- Conclusion
- FAQs
What is a home loan?
A home loan refers to the amount offered by a lender to you, the borrower, for purposes like buying a new home, renovating, or expanding an existing one. Typically, these loans involve a principal amount that you commit to repay gradually, along with interest. The interest rate you qualify for will affect your total cost of the loan, with lower interest rates reducing the overall cost. The property you purchase serves as collateral, meaning if you fail to repay the loan, the lender can seize the property.
Some of the home loan benefits are tax advantages, flexible repayment periods, and the opportunity to build wealth through property appreciation.
Types of home loans available for first-time buyers
If you are a first-time homebuyer, you might be wondering about the different types of home loans available:
Home construction loan
If you're planning to build a new home from the ground up, a home construction loan provides you with the financing you need. With this type of loan, funds are typically disbursed in stages as construction progresses, allowing you to pay contractors and cover materials along the way.
Home purchase loan
A home purchase loan, also known as a mortgage, is used to finance the acquisition of a property. Whether you are buying your first home or upgrading to a larger space, this loan provides the funds needed to complete the purchase transaction, with repayment terms typically spanning several years.
If you are aiming to upgrade or expand your current home, you can check other loan options like home improvement loans and house extension loans.
10 common mistakes first-time homebuyers make
Neglecting credit
Your credit score plays an important role in your ability to secure a mortgage with favourable terms. Avoid actions that could harm your credit, such as missing payments, maxing out credit cards, or opening new lines of credit before applying for a home loan.
Not exploring down payment options
If your down payment is less than 20% of the home's value, you'll typically need to pay Private Mortgage Insurance (PMI), which adds to your monthly housing costs. Exploring options can help you avoid PMI.
Neglecting negotiation
Some sellers or builders offer incentives or rebates to homebuyers as part of the purchase agreement. Don't overlook the opportunity to negotiate for a rebate, which can help offset closing costs.
Fixating on the dream house
If you are a first-time home buyer, you may get caught up in the features of the house itself and overlook important factors like the neighbourhood. Remember to consider the location, amenities, schools, and community before making a decision.
No preparation
Rushing into the home-buying process without adequate preparation can lead to costly mistakes. Take the time to educate yourself about the home-buying process, gather the necessary documents, and get pre-approved for a mortgage before starting your search.
Neglecting maintenance costs
Owning a home comes with ongoing maintenance and repair expenses. Be sure to budget for these costs in addition to your mortgage payments and other expenses.
Searching for homes before getting pre-approved
As a first-time home buyer, you should not start searching for homes before getting pre-approved for a mortgage. Getting pre-approved will help you understand how much you can afford and make your offer more competitive when you find the right home.
Going over budget
It can be tempting to stretch your budget to buy a larger or more luxurious home, but doing so can strain your finances. Stick to a budget that aligns with your long-term financial goals and lifestyle.
Ignoring inconsistencies in loan estimates and closing disclosure
When you receive your loan estimate and closing disclosure from your lender, carefully review them to ensure they match. Any inconsistency could indicate errors or unexpected fees, so it's better to compare them thoroughly.
Draining your savings
While buying a home is exciting, it's important to have savings for unexpected expenses, emergencies, and future financial goals. That is why you should avoid draining your savings entirely for the down payment and closing costs.
Conclusion
From understanding the types of home loans available to recognising common mistakes, this homebuyer's guide aims to provide you with the knowledge needed to make informed decisions. By taking the time to educate yourself and plan accordingly, you can avoid common mistakes and make the most of your first home-buying experience.
SMFG Grihashakti offers home loans up to INR 1 crore* on under-construction, new, and resale properties at attractive interest rates and flexible tenures of up to 30 years*. Apply for a home loan today and take the first step towards achieving your dream of homeownership.
FAQ's
What credit score do I need to qualify for a home loan?
A credit score of 700 or higher suggests that the individual might qualify for a home loan, depending on other factors like age, income, type of employment, etc. However, the minimum credit score requirement can differ from lender to lender.
How much money do I need for a down payment?
For a mortgage, you must typically pay at least 10% of the property's total value, with the lender covering the rest. It's important to recognise that the exact down payment necessary for a borrower can differ due to various factors, such as the lender's current policies during the loan application process.
What documents do I need for a mortgage pre-approval?
Here is a basic document list:
- Proof of Identity: PAN card, voter’s card, driving licence, employee card.
- Proof of Residence: Aadhar Card, latest electricity bill/piped gas bill, ration card, property tax/water bill.
- Account statements for the past 6 months.
- Income proof for salaried: Salary slips for the last 3 months, ITR for the last 2 years, etc.
- Income proof for self-employed: Balance Sheet & Profit and Loss A/c statements, ITR documents.
- Property documents such as the sales deed.
**Please note that this list is indicative only. Additional documents may be requested depending on your individual profile and the lender’s policy at the time of loan application.
How do I know which type of loan is best for me?
Consider consulting with a reputable lender who can assess your individual circumstances and provide personalised recommendations suited to your needs.
What are closing costs, and how much should I expect to pay?
Closing costs are fees and expenses associated with finalising a real estate transaction. The total amount of closing costs can vary depending on different factors such as loan type and location, but they typically range from 2% to 5% of the purchase price.
What is the difference between a fixed-rate and adjustable-rate mortgage?
A fixed-rate mortgage has an interest rate that remains constant throughout the loan term, while an adjustable-rate mortgage (ARM) has an interest rate that can change periodically, typically after an initial fixed-rate period.
What happens if I can't make my mortgage payments?
If you can't make your mortgage payments, it's important to contact your lender as soon as possible to discuss your options and agree upon new loan terms. Ignoring the issue can lead to serious consequences, including foreclosure and the loss of your home.
Disclaimer: *Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG Grihashakti. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG Grihashakti’s policy at the time of loan application. If you wish to know more about our products and services, please contact us.