10 Mistakes to Avoid
Buying a home for the first time is a huge undertaking. It can be overwhelming, exciting, and terrifying. It’s also a major commitment. You have to go into it with your eyes wide open and armed with good information. We’ve compiled a list of ten common mistakes inexperienced home buyers make that cost them both financially and emotionally.
1. Getting ahead of yourself
First-time homebuyers are understandably excited about the prospect of owning a home of their own. That makes it easy to overlook the importance of laying the groundwork before actually looking for their dream house. You have to do the hard work of getting your finances in order first.
You’ll need money for a down payment, and a decent credit score, before you can talk to a lender or call a Realtor. Make a down payment savings plan and begin a regular regimen of contributing to it. If you want to buy a house within a year, determine how much you will have to save monthly to achieve your down payment goal.
If you don’t know what your credit score is, find out. You can get a free report from each of the three credit bureaus every year. Make sure all the information is correct and take steps to fix any mistakes. If you have a low credit score, start the process of repairing the damaging accounts and be realistic about how it will take to get your score in the financial approval range.
2. Checking out houses before you get financial pre-approval
Once you’ve reached your down payment goals and have a good credit rating, it’s time to start talking to lenders. There’s no point in looking at houses you won’t be approved for or losing your dream home because your finances aren’t in place.
A lender will tell you the maximum loan you pre-qualify for, which will give you a good idea of how much house you can afford. Being pre-approved for financing tells the seller you are a viable buyer. This gives you a much better chance of winning the house of your dreams if you wind up in a bidding war with other buyers.
3. Thinking all lenders are alike
Failing to compare lenders is like failing to get a second or third opinion when you get a cancer diagnosis. You want to make sure you are getting the best advice possible to ensure the best possible outcome.
Don’t make the mistake of thinking all lenders will give you the same financial package. It’s okay to shop around until you find the best interest rates, lowest fees, and most attractive terms. It’s also important to pay attention to the kind of service you get from the various lenders. Remember – you’re the customer, and they want your business.
4. Assuming 20% down payments are required
It’s a myth that first-time home buyers have to put down 20% of the purchase price. If you have it – great, you can avoid paying mortgage insurance. If you don’t, it’s not the end of the world. The average down payment, according to the National Association of Realtors, is 12%. The average down payment for first-time home buyers is only 7%.
You can buy a house with as little as nothing down if you qualify for a VA or USDA loan. Don’t put off home ownership just because you think you don’t have enough money for an acceptable down payment.
5. Ignoring government loan possibilities
People buy homes every day with small down payments and less than perfect credit. You can too if you look into government-backed mortgages. Conventional mortgages are great, but they can be hard to get unless you have a high credit score and a low debt-to-income ratio.
The FHA offers loans with as little as 3.5% down if you have a credit score of 580 or higher. You can still get a loan with a credit score as low as 500, but you will have to make a 10% down payment to get it. You’ll have to pay mortgage insurance for the life of the loan and make a one-time upfront insurance premium payment of 1.75%. The good news is you can roll the upfront premium into the loan.
The VA offers active or retired military and their spouses mortgage loans with as little as no money down. There are funding fees associated with these loans. In 2022, the amount is 2.3 percent. That amounts to $2,300 for every $100,000 you borrow.
The VA makes these loans through private lenders. There’s a cap on the fees the lenders can charge to keep loan costs reasonable.
The USDA offers loans to home buyers in rural areas. These loans are specifically aimed at low to moderate income buyers and are only available in areas the USDA has designated as eligible. You may not have to put any money down to get one of these loans, but you will have to meet the income requirements.
6. Making financial decisions that affect credit
Don’t assume that once you pre-qualify for a certain loan amount, you can go out and make a big purchase on your credit card without it affecting your loan application. Your credit will be checked again before the final loan approval. If you make a big purchase, your credit rating and your debt-to-income ratio may change. Worst case scenario – you lose out on buying the house you’ve fallen in love with.
Hold off on buying that new car or room full of furniture until after you’ve closed on your house. Don’t put them on your credit card or open a new charge account to pay for them. Make sure your credit balance stays a minimum of 30% below your credit limit and make all your monthly payments on time.
7. Obsessing about the ideal home
It’s not unusual to daydream about the perfect house and how you’ll live in it one day. The problem is – there are no perfect houses. When you’re looking for a new home, you don’t have to settle for something you don’t want, but it does help to be flexible.
It’s no sin to keep an open mind and consider a house with good bones in a great neighborhood that wasn’t exactly what you had in mind. You might find a diamond in the rough if you’re willing to think outside the box.
8. Making decisions based on emotion
It’s never a good idea to fall in love with a house. You’ll lose your perspective and make costly mistakes just because you’re afraid you’ll end up losing it. A house is the biggest investment most people make in their lives. It can be difficult, but you have to keep your emotions at bay. If you don’t, you may end up paying too much and accepting less than attractive terms.
9. Undervaluing the importance of the neighborhood
There’s an old saying that you should buy the least expensive house in the best neighborhood. It’s a good rule of thumb. Remember, you won’t just be living in the house, but the neighborhood as well. You’ll want to make sure the crime rate is low, and if you have children, the schools are good.
It can help to drive around the neighborhood at different times of the day or walk around to get a feel for the atmosphere and the vibes it gives off. On a practical note, keep in mind the resale value of your home should you ever decide to sell. The neighborhood will have a lot to do with that.
10. Miscalculating the cost of home ownership
First-time home buyers often make the common mistake of thinking their house payment is all they have to take into consideration when budgeting for a new home. It’s very important to consider all the other expenses that go into home ownership. They include mortgage insurance, property taxes, home-owners insurance, association fees, maintenance and repairs, utilities, and more.
You’ll need enough cushion to be able to save anywhere from one to three percent of your home’s value every year for unexpected expenses.
Buying a house is exciting. The more prepared you are the more likely you will be to make a smart purchasing choice for yourself and your family. Avoid the common pitfalls inexperienced home buyers topple into, and you’ll never have to worry about buyer’s remorse.