One of the most important financial decisions you’ll ever make is buying your first home. But, this experience can be very nerve-wracking.
You have to take into account a lot of factors, including how much money you’re willing to spend, where you want to live, if you want a single-family residence or townhouse, and what type of financing you want to use.
There are some common mistakes that people make when buying a home, but we’ve compiled the best tips to help you avoid them. This includes avoiding costly mistakes that could end up costing you thousands of dollars.
In this article, we will list the common mistakes people make when buying a home, and explain smarter or better ways to go through the process with as little stress as possible.
1. Not Starting With A Good Credit Report
Mortgage lenders carefully review borrowers’ personal financial information to determine mortgage approval and interest rates. If credit reports contain errors, this could lead to higher interest rates.
That’s because many lenders use automated systems to evaluate borrowers based on factors such as income, employment history and debt levels. These algorithms are programmed to look at certain key data points, like your age, marital status, number of children and location, to determine how likely you are to repay your mortgage.
But if there are inaccuracies in your credit report, those same data points could cause your lender to overlook something important about you — like your ability to pay off your debts. This is where things start getting complicated.
If you spot inaccurate information on one of your credit reports, you can either correct it yourself or ask a creditor to do it for you.
You may request a free copy of your credit report annually from each of the three major credit reporting agencies: Experian, Equifax and TransUnion.
Before requesting copies of your credit reports, it’s a good idea to check your credit score on Credit Karma‘s free app. That way, you can see if there are any errors on your report that need to be fixed.
Your FICO® Score is calculated using information found on your credit reports. If you see anything fishy, you can dispute it by contacting the appropriate credit bureau or get your mortgage broker to do this for you.
If you believe your credit report contains errors or omissions, you can file a complaint with the Consumer Financial Protection Bureau. They take action against creditors who violate the Fair Credit Reporting Act.
2. Not knowing How Much Money You Need To Borrow
When buying a home, it is important to figure out how much you can afford for both the down payment and monthly payments.
If you don’t know how much you can actually afford, you may end up searching for properties that are out of reach.
A mortgage affordability calculator can help you figure out how much house you can realistically afford. You’ll need to enter some information about yourself, like your income, credit score, debt levels and savings goals. The calculator will then give you a ballpark estimate of how much house you can afford.
This way when you find a home you like in your price range you can take the next steps in securing a mortgage.
Pre-Qualified and Pre-Approval
It’s easy to get caught up in the excitement of buying a home and rush into things without taking the time to plan ahead.
If you don’t do some research first, you could end up with a lot of problems later on. That’s why it’s a good idea to get preapproved for a mortgage before you start shopping for a house.
Not getting preapproved for a mortgage could cost you thousands of dollars.
You may think you have a good idea of what your budget is, but there are lots of expenses that aren’t included in the typical mortgage calculation. These include property taxes, homeowner association dues, insurance premiums, maintenance fees, utilities, repairs and improvements to your home, and even closing costs.
3. Looking At Houses Before You Are Pre-Approved For A Mortgage
The home buying process is exciting, so it’s understandable to have the urge to jump in without much preparation. However, shopping for a home before getting initial approval – also called pre approval is a big mistake.
Getting preapproved for a loan is the best way to determine how much house you can afford. There’s peace of mind knowing you won’t need to worry about whether or not you qualify for a loan and you’ll be ready to move forward with confidence.
Taking the time to apply for approval upfront is beneficial in several ways
- One benefit of applying for approval upfront is that buyers can avoid being denied a loan later on when they find the perfect home and there are other buyers bidding on it.
- Another benefit is that buyers can get a better idea of what they can afford before they start shopping for homes and save disappointment later.
- Also, buyers who are approved for a loan upfront may be able to negotiate a better interest rate with a lender.
- An offer that includes a pre-approval letter from a lender will be seen as more serious by home sellers. This is because it shows that the buyer is already approved for financing and is more likely to be able to close on the home.
4. Buying A House Without A Buyers Agent
As I already said, buying a home is an exciting time, but it can also be overwhelming for first time home buyers. That’s why having an experienced real estate agent by your side is priceless.
Even if you are going to buy a FSBO (For Sale By Owner) you can pay the agent yourself and often include the cost of it in the Agreement of Purchase and Sale.
An experienced buyer’s agent is a valuable asset when purchasing a home.
They will be aware of any potential environmental issues, covenants or by-laws that could cause problems down the road. Also, they will have a list of trusted contacts that can help with various aspects of the home buying process.
For example, if there is an issue with the back door step, your agent will know a handyman who can fix it quickly and efficiently. This can save a lot of time and grief during the home buying process.
5. Considering The Neighborhood Or The House First
There are a few things to consider when choosing a neighborhood before finding a house.
You’ll want to consider things like the proximity to your work, schools, and other important places. Another thing to consider is the type of neighborhood. Are you looking for a quiet suburban neighborhood or a more lively urban one?
Once you’ve narrowed down your options, you can start looking at individual houses. Pay attention to the condition of the homes and the overall feel of the community, you might live there a long time.
Also, consider the schools, churches, day care, amount of traffic, crime rates, and public transportation options. You may also want to check the proximity to groceries and shopping. Other factors to consider may include walkability and if it fits your lifestyle.
There will be other things you want to consider in choosing your new neighborhood that are specific to your lifestyle, so sit down with a piece of paper and list off all the things you want your area to have. Don’t leave out the small stuff- sometimes it’s the small stuff that breaks the camels’ back.
There are a few reasons why you might want to choose the house first and the neighborhood second.
The most obvious reason is that you may have already found your dream home and you’re willing to compromise on the neighborhood in order to live there.
Another reason is that you may be looking for a home in a very specific price range and you’re willing to sacrifice the perfect neighborhood in order to stay within your budget.
You may have a specific type of house in mind that you want to live in. For example, you may want to live in a house with a certain number of bedrooms or a certain type of layout. If you have certain wants or needs, you can then look for neighborhoods that have houses that match your criteria.
6. Not Getting The Down Payment Amount Right
It takes the average millennial 3.75 years to save up for a down payment.
One in nine (11%) homeowners under age 35 who were surveyed by NerdWallet agreed with the statement “I should have waited until I had a bigger down payment.” This was one of the most common regrets that millennial homeowners had.
A bigger down payment will let you get a smaller mortgage and lower monthly payments.
A smaller down payment, on the other hand, will require a larger mortgage and higher monthly payments.
OK, so what is the right amount to put down?
The acceptable range for a down payment on a home is 0%-20%.
- VA loans usually do not require a down payment, and some conventional mortgages require as little as 3% down. Conventional loans are not backed by the government, but they follow the down payment guidelines set by government-sponsored enterprises Fannie Mae and Freddie Mac.
- FHA loans, which are backed by the Federal Housing Administration, require as little as 3.5% down if you have a credit score that’s at least 580. If you have a credit score that’s between 500 and 579, FHA loans require a 10% down payment.
- Jumbo loans are home loans that fall outside of the Federal Housing Finance Agency’s conforming loan limits; because these outsized loans can’t be guaranteed by the GSEs, lenders tend to ask for higher down payments in order to offset some of the risk.
- Private mortgage insurance is insurance that protects the lender in the event that the borrower defaults on the loan. It is typically required for loans with a down payment of less than 20% of the purchase price.
7. Not Talking To Enough Lenders
Nearly half of the first time home buyers don’t shop around for a lender. Some just walk into their bank and sort one out, which of course the banks like.
Mortgage brokers are independent agents and work with many different money lenders so they can offer you a wider range of options when it comes to your mortgage. They are not beholden to any one bank or lender, so they can shop around for the best rates and terms for you. This means that you are more likely to get a good deal on your mortgage through a broker than you would by going directly to a bank.
Don’t just go to one mortgage broker though. You want them to come to you with a sharp pencil and start with their best offers.
Like a good Realtor® a mortgage broker will have your best interest in mind and can guide you through the financing side of things. Mortgage brokers want to get your future business so they will try very hard to win it over their competition.
8. Choosing the Wrong Mortgage Type
Usually an adjustable rate mortgage (ARM) will save you money in the long run compared to a fixed rate mortgage but lately millennials are opting for fixed rate mortgages over adjustable rate mortgages.
Why?
Millennials are generally more risk-averse than previous generations. This is partly due to the fact that they came of age during the Great Recession, and saw first-hand how devastating an economic downturn can be. As a result, they’re more likely to opt for the stability of a fixed-rate mortgage, even if it means paying a higher interest rate.
Fixed rate mortgages offer predictability and stability, which can be helpful for homeowners who want to stay in their homes for the long haul. Because fixed rate mortgages have locked-in interest rates, monthly payments will never go up (or down), making it easier to budget and plan for the future.
An adjustable rate mortgage is a type of mortgage in which the interest rate is not fixed. Instead, it fluctuates with interest rates.
So when rates are low, an ARM is a better choice. But with interest rates set to increase, this might be a good time for first time home buyers to lock into a fixed rate for the length of your mortgage.
This can save you money in the long run, but only if interest rates go above your fixed rate for a suspended period of time.
9. Not Looking Into First-Time Home Buyer Programs
As a first-time homebuyer, it might seem like you’re stuck waiting around until you save enough cash to put 20% down on a house. But there are actually plenty of ways to finance a home without putting much money down. In fact, some states even provide financial aid to help you pay off those loans faster. Here are five programs worth checking into if you want to buy a house soon.
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Down Payment Assistance Programs
Many states offer down payment assistance programs, which allow eligible borrowers to receive government funds toward the purchase price of a property. These programs typically require applicants to meet certain income requirements and show proof of assets. Some programs require borrowers to use the funding to cover both the down payment and closing cost savings. Others limit the amount of assistance offered per household.
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Federal Housing Administration Loan
The FHA offers a variety of loans to help first-time homebuyers afford homes. While the program doesn’t offer down payment assistance, many lenders offer low-interest rates and flexible repayment plans. Borrowers must prove they have a good credit history, though, because the FHA does charge a premium for its insurance policies.
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VA Loans
VA loans come with 0% interest rates and lower fees than conventional loans. They also provide special benefits like tax breaks and free home inspections.
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USDA Loans
The USDA offers a loan program that allows people to borrow money to buy a house in a rural area. There are some income limits, but in general, the program is available to low- and moderate-income households. The loan terms are typically 30 years, but may be shorter depending on the borrower’s ability to repay.
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3 First-Time Home Buyer Assistance Programs
- HUD (Housing and Urban Development) offers programs making homeownership affordable. One such program is the HUD Good Neighbor Next Door program, which offers discounts of 50% on the purchase price of homes to certain public servants, such as teachers, firefighters, and law enforcement officers. Another program offered by the HUD is the Housing Choice Voucher program, which helps low-income families afford safe and decent housing.
- Freddie Mac is a government-sponsored enterprise that provides liquidity for the mortgage market. It does this by buying mortgages from lenders and then either holding them in its portfolio or packaging them into mortgage-backed securities and selling them to investors. Freddie Mac also provides credit enhancement for these securities, which reduces the risk for investors and makes them more attractive.
- Fanny Mae’s government HomePath Ready program is a program that helps middle to low income people buy homes. The program provides educational information on how to buy a home, how to get a loan, and also provides 3% down payment assistance and closing cost assistance up to 3%.
10. Buying More House Than You Can Really Afford
You went to the bank and they said they would lend you a shocking amount of money. If your first reaction was “how will I pay it back” then follow your gut.
There are first time home buyers that will take everything the bank will lend them and be house poor just for the prestige of living richer than they are.
The wiser choice is to buy the worst house in the best neighborhood. With some cosmetic work over time you can sell it for a profit and move up to a bigger house without breaking the bank.
11. Keeping Enough Money Aside For Closing Costs, Moving Expenses and Emergencies etc.
You need to do this!
Closing costs can be around 2-5% of the purchase price of the house, so you need to make sure you have enough money to cover this.
Moving expenses can also add up, so it is important to have a budget for this as well. Call and get some quotes so you know what that’s going to cost.
Lastly, you need to have some money set aside for emergencies, as you never know what might happen when you move into a house.
12. Not Getting A Home Inspection
Of all the things you can do to protect yourself this is #1 on the list. You would only skip a home inspection if you are buying an old house to tear down.
Hiring a professional home inspector is the best way to protect yourself when buying a home.
They are trained to spot potential problems and will take pictures in hard to get at areas that could be cause for concern to check for things like mold and rot.
If there are any issues with the home after you purchase it, you will have documentation from the home inspection to back up your claim when you go to court.
Final Thoughts
Do your research.
There are a lot of things to consider when you are a first time home buyer, and things can sometimes go wrong.
A good Realtor® can be worth their weight in gold, as they will deal with all appointments and paperwork, and can be critical if an issue arises.
A good mortgage broker will get you the best financing and keep you from making poor or rash decisions.
A good home inspector will protect your investment. A home is the most expensive thing you will ever buy. It would be heartbreaking if something went wrong after you moved in.
