6 First-Time Home Buyer Mistakes To Avoid
Thinking about buying your first home? Before you can unlock the door to homeownership, you have to take some important first steps. From finding the perfect location to financing your purchase, shopping for your first home has challenges that go beyond curb appeal and interior features.
Some of the important steps to homeownership include:
- Getting approved for a mortgage.
- Choosing the right real estate agent.
- Finding the right home that fits your budget.
Here are five common mistakes first-time homebuyers should avoid.
1. More to it than mortgage payments
Many first-time homebuyers decide to buy when they feel ready for a mortgage. But just because they can afford the mortgage payments doesn’t mean they can afford to own a home, says New York attorney Rafael Cantellanas.
“They have an idea of what their mortgage payment is going to be, but they don’t realize there’s much more to it,” he says.
Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time homebuyers tend to overlook when shopping for a place.
“Keep in mind property taxes and insurance have a tendency of going up every year,” Castellanos says. “Even if you can afford it now, ask yourself if you’ll be able to afford the increased costs later.”
2. Looking for a home first and a loan later
Home buying doesn’t begin with home searching. It begins with a mortgage prequalification — unless you’re lucky to have enough money to pay cash for your first house.
Often, first-time homebuyers “are afraid to get prequalified,” says Steve Anderson, a broker in Las Vegas. They fear the lender may tell them they don’t qualify for a mortgage or they qualify for a loan smaller than expected. “So they pick a price range out of the sky and say, ‘Let’s go look for a house,'” Anderson says.
And that’s not how it should be done. Yes, it’s more fun to go look at houses than to sit in a lender’s office where you have to expose your financial situation. But that’s a backward approach, says Ed Konarchy, a mortgage planner and investment adviser in Gurnee, Illinois.
“You get preapproved, and then you find a home,” he says. “That way, you’ll make a financial decision versus an emotional decision.”
3. Only talking to one lender
New to the home buying game? You’ll need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer.
Venturing into this process alone, without professional help, is not a good idea. While every rule has its exception, generally, first-time homebuyers should not try to deal directly with the listing agent, Anderson says.
“If you are getting divorced, are you going to go to your husband’s attorney for help? Of course not,” he says. “Same here. If you go to a listing agent, they are only going to show you their listings. You must find a buyer’s agent to help you.”
If you hire an agent without a referral from friends or family, ask the agent to provide references from previous buyers. The same goes for loan officers or mortgage brokers.
Most home shoppers use a lender who was recommended by a friend, family member or real estate agent, and they don’t bother shopping around. But that doesn’t guarantee you’ll get the best rate, or even get a lender who is experienced with loans for your particular situation. The CFPB recommends talking to at least three lenders to get the best loan for you.
Although it’s not required, most home shoppers end up getting a loan through the lender who pre-approved them. So it’s a good idea to do your research with lenders early, at the pre-approval stage.
“It’s very hard for first-time homebuyers because they don’t know who they are dealing with,” Anderson says.
It’s crucial to find a professional who will give you “truly independent advice,” Konarchy says. Sometimes that means hiring a lawyer.
4. Using up savings on the down payment
Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make, Konarchy says.
“Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” he says.
Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge, Konarchy says.
“I’d take paying for mortgage insurance any day over not having money for rainy days,” he says. “Everyone — especially homeowners — needs to have a rainy-day fund.”
5. Getting new loans before the deal is closed
You have prequalified for a loan. You found the house you wanted. The contract is signed and the closing is in 30 days. Don’t celebrate by financing another big purchase.
Lenders pull credit reports before the closing to make sure the borrower’s financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing.
Buyers, especially first-timers, often learn this lesson the hard way.
“They sign the contract and they want to go buy new furniture for the house or a new car,” Anderson says. “I remember one case where, just before closing, the buyer drove to the office and said, ‘Look at my brand-new car.’ I told them, ‘You’d better go back to that dealership.'”
Luckily, the dealership agreed to wait a couple of days to report the loan to the credit bureaus, he says. Otherwise, it could have killed the deal.
6. Not researching down payment assistance programs
Saving for a down payment is often cited as the biggest hurdle to homeownership for first-time buyers. But did you know there are thousands of down payment assistance programs in the U.S.?
These programs typically offer “soft” second or third mortgages or grants which allow for zero percent interest rates and deferred payments. Ask your real estate agent or lender if there are programs in your area that you may qualify for.