Buying Your First Home - A Warning

Buying your first home? Congratulations! But watch out! Some of the people that are there to help you may also be there to get you into trouble. Here are some of the tricks they might try, and what you can do about them.

Lenders

When you are buying your first home, you can bet that there will be lenders waiting to take advantage of - I mean help you. They will tell you that it's fine to have 40% of your take-home pay going to your mortgage payment. Apparently it is fine with them, since they get the house if you can't make those monthly payments.

Can't quite afford that payment? Mortgage lenders will "helpfully" suggest that one way you can lower your payment is with the lower interest of a variable rate loan. The teaser rate may be as much as 2% less than going rates, meaning your payment on a $200,000 30-year loan (at 5.5% versus 7.5%) is $1,135 instead of $1,398. Of course, if you couldn't afford the $1,398, what will you do when in a year the teaser rate ends, and interest rates have risen 1%? Now your payment jumps by over $400 to over $1,500.

Hundreds of thousands of people are facing foreclosure right now in this country. They were helped to get into that position by "friendly" lenders. Before you accept any interest-only or variable-rate loan, look at the worst case scenario (interest rates going up 5%, temporarily losing your job). If you can't handle that, you are risking too much.

Also watch out for all the other tricks that lenders try with first time home buyers. Before you pay big "points" to lower that interest rate, calculate whether it makes sense. The savings from that lower payment may take as much as eight years to repay the thousands extra those points cost you. Will you still be in the house (most people are not in their first home after eight years).

Real Estate Agents

Did you sign a contract with your real estate agent, hiring her to represent you? If not, she probably is representing the interests of the seller, no matter how helpful she is to you. What does this mean? Well, she can help you find exactly what you need perhaps, but when you make that offer and mention that you will go $5,000 higher if necessary, she is legally obligated to pass that little bit of information on to the seller. Watch what you say.

Also pay attention to whether the agent is really showing you the houses that suit your needs, rather than the ones that he likes. I have noticed that many real estate agents don't listen very well, and often show the buyer what they think he wants, rather than asking more questions. This can lead you to buy a house that doesn't suit your needs and costs more than is necessary.

Real estate agents are not legal experts nor builders. I've seen agents suggest that this or that problem isn't serious (like cracks in a foundation) just to help a sale along. You are most vulnerable to this when you are buying a first home. If you are not sure about something, have an inspection done by a real expert (put an inspection contingency in the offer). If you are not sure about the contracts you are about to sign, have a lawyer with real estate experience review them.