Buying a home is complicated and that’s doubly true for first-time homebuyers. It’s easy to make a tiny mistake that has big consequences, ranging from costing you a ton of money to having to set your efforts back several months. Here are fourteen common mistakes that you should keep in mind, along with how to avoid them.
1: Waiting to apply for a mortgage
One of the fastest and easiest mistakes a first-time home buyer can make is to shop around for homes and seek out a mortgage later. This may seem like a natural course of action, but it can lull you into a false sense of security about your finances, not to mention that it can lock you out of great homes that you might have been able to snag.
The simple fact of the matter is that you need to see a lender in order to see what kind of mortgage you can get. You may think you can estimate on your own, but you may have a number of unique factors that may increase or decrease how much a mortgage lender is willing to give you. The last thing you want is to find the perfect home, assume it’s completely in your price range, then visit a mortgage lender and find out that they simply won’t finance you for that amount.
The other big problem is that applying for a home mortgage can take a while. If you find a home that you love, but the competition is fierce and you haven’t applied for a mortgage yet, then it might be as good as gone. If you aren’t coming to the table with your ducks in a row, then the seller probably won’t wait around for you to go through the application process, especially not if they’re trying to get rid of the home quickly.
2: Limiting yourself to one mortgage lender
Just as with buying anything, it can be tempting to go with a first offer that sounds great. However, if you don’t at least explore your options and get a feeling for what different mortgage lenders offer, you could be missing out on a huge chunk of savings. This can take the form of a lower interest rate, but don’t forget about all the hidden costs and fees that can accompany some mortgages.
Ideally, you want to get in touch with several mortgage lenders to get an idea of your options. Mortgage brokers that will shop around for you are one option, but keep in mind that they might not get you the best deal possible. They might opt for a mortgage that personally makes them more money on the commission rather than what would result in the most savings possible for you, the customer, in the long run.
3: Exceeding your budget
Not buying outside your budget may seem like common sense, but it still causes problems for lots of first-time home buyers. What can seem like a home that’s just a tiny bit out of your price range can quickly spiral into a whole host of other problems. To start with, it means you’re spending a bigger chunk of your income on your home, leaving less room for bills, entertainment, and emergencies.
Then, you also need to consider potential developments in the future. If the housing market changes, then your home may lose a significant amount of value. It may be harder to sell your home, which can be a problem especially if you’ve planned out your future to that extent. Furthermore, if you do encounter some financial hardships in the future such as losing your job, you will have less of a safety net compared to if you had picked a more affordable home.
One trick is to look more at how your payday gets split up rather than how many hundreds of thousands a mortgage lender will give you. It’s hard to wrap your head around the subtle details when it comes to massive amounts of money and a few tens of thousands in either direction can seem irrelevant, but when you break down how much you’d spend each month on paying the mortgage off, you can get a much better idea of your situation.
4: Rushing the process
Trying to cram and sprint through the process is one of the worst moves you can make. When you’re dealing with an amount of money as large as a mortgage, you need to make sure that you consider every possible angle.
For starters, you want to take some time to gauge your financial situation, where the market is, your chances of getting a good mortgage, and any other additional factors. If you’re lacking in one area and think it might improve in the near future (for example, if you think you’ll get a promotion soon), then it can pay hugely to delay your home search until then. If you’ve got poor credit, work on raising that before anything else. The better terms you can get on your mortgage, the more you can save on what will probably be one of your biggest annual expenditures going forward.
If you get caught up in buying a home and then rush to get a mortgage, you’re not going to have as much control over the terms. You won’t be able to get mortgages that have a long application process, plus you simply might not have the time necessary to browse and compare options. You also won’t have the ability to wait out any temporary fluctuations in the market that might be driving interest rates up for the time being.
5: Spending your savings
It’s true that securing a home and mortgage can take a chunk of money, but you shouldn’t be satisfied with the idea of spending all your savings on the down payment. Even disregarding the poor idea of tapping into retirement funds, you don’t want to drain your bank account just to secure the home of your dreams. You need a cushion in case something goes wrong.
One of the main reasons why first-time homebuyers are tempted to spend so much is that putting down 20% can waive the need for mortgage insurance. This can save some money in the long run, but if you’re using up all your immediate funds to get there, you’re making a big mistake. If something unexpected does pop up, whether it’s a big medical bill or a car breaking down, the costs could easily balloon past whatever savings you may have built up. You also need to consider the psychological cost of just scraping by in order to save money down the road. Is the stress worth it?
6: Excessive credit usage
One easy error that many first-time homebuyers make is to assume that they only need to pass one credit check from their lender. The truth is that there will be multiple credit checks, including one at the end of the application process and right before approval. This means that not only should you avoid opening up new lines of credit before you apply for a mortgage, but you also shouldn’t apply for anything during the process.
This means that if you really need to get a new credit card, you shouldn’t put it off until after you start the mortgage process. You should open it beforehand, then not open anything up after the application starts. Pay off your existing debts, make your monthly payments, and thereby assure your lender that you will pay off your mortgage.
7: Getting tunnel vision
It can be easy for first-time homebuyers to get caught up in the specifics of a home. If you’ve been looking for months and finally find a home that has the perfect room layout, flooring, and yard, then it’s all too easy to ignore other crucial factors like the neighborhood and school/store/employment proximity.
In reality, what you want to do is prioritize the location of your home over what it actually contains. If you plan on living there for a while, you can always expand or renovation, but you can’t reliably expect new shops, schools, or employment opportunities to open up closer to your house.
It can be frustrating, but waiting a little longer and searching for a home that meets your geographical needs is the best route.
8: Making impulsive decisions
When shopping for homes, it’s easy to fixate, but it’s also easy to make decisions driven purely by emotion. After months of fruitless searching, the lure of a home that looks great at first glance only becomes more appealing. However, buying a house is also one of the biggest financial decisions you will make in your life. You need to make sure that you have all the facts before you commit.
When you do set a budget, try as hard as you can to stick to it. Give yourself a bit of time to evaluate each house that pops up, don’t go into a buying frenzy because there’s a chance the home might get snatched up.
9: Misunderstanding down payments
One common myth is that home buyers absolutely need to put 20% down on a home. While that 20% does waive the need for mortgage insurance, it’s really not as common as you might think. It’s more common to put down around half of that.
The biggest problem with thinking you need 20% is actually getting that 20%. It can take years to scrounge that extra money up, which can put you in a poor position to take advantage of favorable market trends.
The second biggest problem with spending 20% is that you won’t have that money in the future. This sounds obvious, but 20% of a home can be a huge amount of money, depleting your emergency funds and putting you in a poor position to deal with other problems that might crop up in the future.
10: Holding out for the perfect house
The huge significance of buying a home can make it seem like nothing but the perfect fit will suffice, but that’s a surefire way for a first-time homebuyer to miss out on a ton of great homes. Remember that you aren’t necessarily searching for something that will last the rest of your life, you’re searching for a good foundation for the rest of your life. If you do choose to live in the house for decades, you can always expand the house, renovate, or refurnish.
The other problem with searching for a unicorn of a home is that it will dramatically increase the length of the process. A search that might only take a few months otherwise can turn into year after year of looking into potential candidates. This can quickly become mentally exhausting as you spend your free time weekend after weekend poring over new listings and checking to see if the price on some good choices has dropped. In turn, this can make you much more susceptible to making regrettable decisions and throwing in the towel for any old home.
11: Not exploring loan options
While conventional loans are one option, they certainly aren’t the only options for first-time homebuyers. Consider other types of loans (such as government-insured loans) that might give you the extra push you need to make your dream home a reality. Three of your best options are VA loans, USDA loans, and FHA loans.
VA loans come from the Department of Veterans Affairs and are designed for eligible service members. They don’t need a down payment on your part, making them one of the best options if you don’t have enough in savings for other loans. These loans may require a funding fee, but it’s generally a lot lower than a down payment. VA loans also have a limit on lender fees, which means that you can’t get taken by surprise by a swarm of tiny fees.
USDA loans come from the Department of Agriculture and help first-time homebuyers in rural areas. These loans tend to have limits on income since they are meant to help borrowers with lower incomes. In some cases, USDA loans require down payments, but not always.
FHA loans are from the Federal Housing Administration and require a down payment, but only a small one: 3.5%. These loans also require a 580 credit score, which is low enough that many determined first-time homebuyers can meet it with a little preparation. However, FHA loans do require mortgage insurance, so be aware of that.
12: Ignoring minor costs that add up
One of the biggest pitfalls of buying a home is all of the minor costs that quickly add up. On top of the fees associated with a broker and actually acquiring the home, there are also a ton of minor recurring fees that can quickly add up to hundreds or thousands of dollars per year. From specialized types of home insurance to repairs, maintenance, and property taxes, there are a lot of little ways that your home can drain your paycheck if you’re not paying close attention before buying.
The best way to minimize the damage is to browse your options before you buy. Compare insurance companies, determine whether certain kinds of home insurance are mandatory in your area, figure out if you can pay down enough to avoid mortgage insurance, and calculate your income with these new factors in mind. It may end up requiring that you look for a home with a smaller price tag, but that’s much easier than buying a more expensive home and later finding out that you can’t afford it at all.
13: Improperly using gifts
Getting a little help from family members and close friends is common with buying a new home, but it may surprise you to find out that there’s a specific way to go about it. Gifted money is subject to certain legal restrictions that you might not be aware of. On top of that, if you don’t end up getting the gifted money and you’re already in the middle of the home buying process, it can tank the whole thing.
14: Missing out on a rebate
Homebuyer rebates are a special type of rebate you can apply for and get up to 1% of the home’s sale price. They don’t work in every state, so check to make sure that your state is among the forty that do allow them. In order to get the rebate, you should bring it up to your agent.