Buying a home, particularly for the first-time homebuyer, is one of the largest, most significant, and most complicated purchases that will be made in your adult life. While this process can be fun, even exhilarating at times, it can also be a roller coaster of emotions and stress. There are so many things to keep in mind and consider during the process, that it’s possible to make one or more mistakes during your home-buying journey.
Some of these mistakes can cost you time and cause you to potentially miss out on a home that seems perfect. Other mistakes may cost you money or may cause your lender to reject your loan or mortgage application. We’re going to take a look at some of the many mistakes home buyers can make, how they can affect the process, and talk about ways to potentially avoid or minimize the damage these mistakes can cause.
Not Knowing What You Can Afford
Browsing for homes, or even touring them and attending open houses before knowing what you can afford can be a huge waste of time. Not only could you spend valuable time looking at houses that are well outside of your budget, but you may also waste time looking at homes that are below what’s referred to as your “optimal price level”.
The goal of most first-time home-buyers is generally to get a home loan that is sufficient enough to allow them to purchase the home they need while maintaining a manageable monthly payment. The best way to avoid under or overestimating your home purchasing power, is there are many mortgage calculators online that can help you narrow down your price range.
Getting A Single Mortgage Quote
Home buying is one of the biggest and most important purchases you are probably going to make for several, if not many, years. This means that while you may have a mortgage lender in mind or one that has been recommended to you, you should always be sure you get offers from multiple lenders. Not only might your approval amount vary, but you may find that the interest rate, fees, and points will vary significantly from one lender to another.
Many new home buyers are hesitant to apply for quotes from multiple lenders because they believe that applying for a mortgage is similar to applying for a credit card in the way that their credit score can be affected. This is a valid concern at a time when your credit report will be gone through with a fine-toothed comb, but multiple mortgage applications within 45 days will all be counted as a single inquiry, allowing potential buyers to get offers from several lenders and to pick the best one.
Not Checking & Fixing Your Credit
In all likelihood, your credit report will never undergo such a deep examination as when you apply for a home loan from a mortgage lender. They will dig into your creditworthiness in a way that few other lenders or credit providers will do. This means your credit will need to be in the best shape possible, with as few debts and missed payments as you can manage, and failing to do a credit clean-up can leave lenders giving you the thumbs-down on the best terms.
To help prevent this and to make sure your credit looks as good as possible for the loan application, be sure you have gone through your credit report yourself and fixed any derogatory marks that you can. You can get a free copy of your credit report once per year from each of the three main credit bureaus, as well as from credit-monitoring apps like Credit Karma. Find your debts, and either pay them or settle them, but be sure you get a written agreement that when the debt is paid the company will immediately remove the item from the user’s credit history.
Not Putting Enough Down
While your parents or grandparents might try to suggest that you “wait to buy until you can put 20% down”, this is a relic from a bygone era for most. With home prices skyrocketing, many buyers would be lucky to be able to put half of that away as a down payment. Regardless, putting away too little can put you in a challenging spot with your lender by making your monthly mortgage payment higher than is comfortable, it can also force you to buy mortgage insurance to protect your lender.
If you simply cannot currently boost the amount of your down payment, remember that there are virtues to just waiting until you have more cash available. More than 1-in-10 first-time homeowners reported that they should have waited until they had put more away. While having 20% can mean you won’t be required to purchase mortgage insurance, the average is often more than 10% but less than 20%.
Neglecting First-Time Buyer Programs
If you are one of the many home buyers that are getting ready to buy their first home, there are many different programs that you should look into before committing to anything, particularly since not doing to can prove to be a costly mistake.
Many states have down payment assistance as well as competitive interest rates for first-time buyers. These programs can also reduce the down payment that the lender will require, and some can even get loans approved without any down payment at all.
Neglecting USDA, FHA, & VA Programs
Tons of first-time buyers won’t be able to put down tens of thousands of dollars for their loan, however, some programs are offered by the federal government that can help the buyer more easily work with a lender to get a loan that works for them.
VA loans are for those who have served in the military and they can help veterans get a home with no down payment, only needing a fee instead of mortgage insurance. USDA loans are another loan that can get a buyer into a loan with 100% financing, using a similar fee alternative to mortgage insurance like VA loans, as well as an annual fee. FHA loans can drive the down payment requirement to just 3.5%, though they require mortgage insurance for the entire duration of the loan.
Being Unsure Of Leveraging Discount Points
Discount points are fees that you pay to reduce the interest rate you pay on your mortgage. Interest discounts can potentially save the homeowner thousands of dollars over the life of the loan, however, if just getting the minimum down payment together was a serious accomplishment for you, don’t sweat the discount points for now. If you have enough cash on hand though, they can help save serious money if the buyer lives in the home beyond the loan’s break-even period.
Emptying All Your Savings Before The Sale
Buying any home other than new construction will mean that you will likely need to repair or replace something, and generally, that will happen sooner rather than later, or whenever is more inconvenient for you. If you’ve just emptied all of your savings to put a sizeable down payment on the home, this can put you in a difficult spot. Be sure that you will still have sufficient liquidity once the closing is complete and you officially own the house, you’ll almost always need something fixed shortly.
Applying For Additional Credit Too Soon
This is one of the most common ways that first-time buyers hinder their buying process. Since one of the heaviest factors in considering your mortgage application is your current debt-to-income ratio, changing that in the middle of the process can be devastating.
In the period between when you apply for the mortgage and the final closing process, you mustn’t apply for or take on additional credit lines or debt, you want your credit report and credit score to be as consistent as possible during this critical time.
Focusing Too Narrowly On The Purchase
first-time homebuyers can get too focused on the buying process and the purchase of the home itself, that they forget there will be significant additional expenses once the sale has been finalized. Not only will there be an ongoing mortgage payment, but there will be all of the usual bills and expenses associated with homeownership.
You’ll need utilities, homeowner insurance, and potential homeowners association fees, so be sure you estimate these as closely as possible before submitting an offer on a property. Having a solid real estate agent can be invaluable in this respect.
Looking At The House But Not The Neighborhood
This is another thing that an experienced real estate agent can help first-time buyers with since many will be laser-focused on the home itself in many cases. Make sure you know your priorities beforehand, such as school preferences, job availability or commute times, and more. Not only is having a good home critical to you and your family but being in an environment where you can thrive is important as well.
Underestimating Potential Renovation Costs
first-time homebuyers that aren’t buying an incredibly new, recently built home will often have the cost of repairs or renovations take them by surprise, even after a home inspection, or more than one home inspection, before the sale closes. There are often minor repairs that are needed immediately, as well as changes that the new owners will want to make to make the home theirs, which will generally cost more than they think.
An oddly significant factor in this is how much the “home renovation” reality TV shows often skew buyers’ estimates of the cost, effort, and time involved in major renovations. Not only do most first-time buyers not have the resources for these projects, but they generally don’t have the experience or expertise to do them themselves either. Buying a home with the intent of completely or even significantly renovating it is often best left to real estate investors.
Shopping for the perfect home is a waste of time and effort since they simply don’t exist. By now you should have a shortlist of your needs, and often a much longer list of your wants, but don’t try to check off everything on that list. Once you find something that meets all your needs, it’s going to take a compromise to decide on which one checks enough of your wants as well.
Forgetting About Gift Money
A large number of lenders will allow some threshold of “gift money” towards a down payment. This can be money given freely by a friend, family member, charity, or even an employer. Be sure any gift money is lined up and fully available before you even start shopping, and make sure you compare gift limits when you shop around for lenders.
Neglecting A Potential Homebuyer Rebate
An obscure point for first-time buyers to know about is that there is the potential to negotiate a homebuyer rebate, sometimes called a commission rebate since it comes from the buyer agent’s commission. This can be a rebate of up to 1% of the home’s final sale price. The availability of this rebate will depend on the state you live in, but since it can mean thousands back in the buyer’s hand, it is always worth investigating.
Not Properly Investigating The Title
You will need to hire a title company to make sure that there are no issues with the real estate title. This is crucial, and while the company will research to the best of its abilities, there will still be a small potential for there to be undiscovered liens or other issues after the sale is completed. It is always a good idea to have more than one title company investigate the title if money allows.
Buying A Home Is A Complicated Process & There Is A Lot To Consider
Even though it seems like there are just too many things to keep straight and that a mistake is inevitable, take it slow. Make sure you have taken the time to get your credit report looking great, and that you’ve put away a significant down payment, then get plenty of options for your loan. Information will be one of your greatest points of leverage in having a successful home buying journey, so knowing the common pitfalls can be invalu