Top 10 mistakes People Make When Buying Their First Home
You’re finally ready to take the plunge and buy your first home. Congratulations! Buying a home is a big financial investment and commitment. Many people dream of this moment for years, and once they are finally on a verge of achieving it, they want to do everything right. Unfortunately, this process is complicated, and there are many first-time homebuyer mistakes to avoid.
One of those mistakes we want to mention is not getting pre-approved for a mortgage. The first step in the home-buying process is getting this pre-approval. By doing this, you will get an idea of how much money you can borrow and what kind of interest rate you’ll be looking at. Without this information, you could end up overpaying for your home and later on ask yourself did you make a mistake buying a house altogether.
Other home-buying mistakes that should be avoided include failing to research the neighborhood you are moving to. Just because you like the house doesn’t mean you’ll like the neighborhood it’s in. Before making an offer, take some time to drive around the area and get a feel for what it’s like. You should also look up crime statistics and see if there are any schools or other amenities nearby that are important to you.
Making a lowball offer. If you want to get the best price on your new home, you need to make sure your offer is competitive. Start by looking at recent sales in the area and seeing what similar homes have gone for. Then, work with your real estate agent to come up with an offer that’s fair but still gives you some negotiating room.
And one of the biggest mistakes in buying a house do’s and don’ts category certainly is skipping the home inspection. A lot of first-time homebuyers think they can save money by skipping this pricey visit of a home inspector but in reality, you are not an expert and are probably going to miss many things that should be checked before the purchase. Look at it this way, if you decide to pay for this now, there will surely be a lot less to be fixed down the line.
As you can see, when it comes to buying a home for the first time, there are a lot of things that can go wrong. We mentioned just some of them, but in continuation, we will not only explain what not to do when buying a home but also answer some of the questions you probably have on this subject. This guide will surely help you avoid many pitfalls so that you can enjoy your new home.
Buying a More Expensive House Than You Can Afford
It is only natural for you to can’t wait to have your own house, but that doesn’t mean that you should be careless when it comes to making such a big decision. When you’re buying a home for the first time, it’s easy to get caught up in the excitement and overlook some important details.
One of the most common mistakes first-time home buyers make is purchasing a more expensive home than they can afford.
Before you start house hunting, sit down and calculate your budget. How much can you realistically afford to spend on a monthly basis? Once you have a number in mind, stick to it! It can be tempting to try to stretch your budget when you find a house you really love, but resist the urge.
Remember that it’s not about how big the house is because at the end of the day a house doesn’t make a home. If you will be too stretched out by this purchase, why not just go for a more affordable option? The mortgage is a long-term commitment and it should not be taken lightly. You never know what could happen tomorrow, and if you can barely afford the house today, it is better to choose another one.
If you’re not sure how much of a mortgage you can afford, there are online calculators that can help. Keep in mind that your monthly payment will also include things like insurance and taxes, so be sure to factor those in as well.
Purchasing a home is a big financial decision, so do your research and take your time. Don’t let yourself be pressured into making an expensive purchase that you’ll later regret.
Ignoring VA, USDA, and FHA Loan Programs
Before this big purchase, be aware of the various loan programs available to you. Some common programs include VA, USDA, and FHA loans. Ignoring this is on top of the first-time homebuyer mistakes list. These programs have a lot more favorable terms than any conventional mortgage so they should be your first option to consider.
There are a number of reasons why VA, USDA, and FHA loans can be beneficial for first-time homebuyers. For one, these loans often have lower interest rates than traditional loans. Additionally, they require little or no down payment. And finally, they may offer more flexible credit requirements.
If you’re a first-time homebuyer, speak with a qualified lender to see if one of these programs is right for you.
Being Careless with Credit
Another one on our list of 10 things not to do when buying a home is being careless with credit. If you’re not careful, it’s easy to let this aspect get out of control. By maxing out your credit cards, missing payments, and letting your account balances go unpaid you will lower your credit score quite a bit. This, at the end of the day, will lead to higher interest rates on your mortgage, making it more expensive to buy a home.
It’s important to keep an eye on your credit score and make sure you’re doing everything you can to keep it high. Paying your bills on time, keeping your balances low, and using a mix of different types of credit will all help you maintain a good score. Additionally, you should periodically check your credit reports in case there have been some errors that can lower your score.
In case you were wondering if you can buy appliances with a home loan, the answer is yes, and we by no means say that you shouldn’t do so. However, buying furniture before closing may not be the best decision you can make.
The essential thing here to remember is to be mindful of where your money is going and isn’t to not spend any at all.
Not Preparing for the Mortgage Process
To continue with our what not to do when buying a house list, the next thing is not preparing for the mortgage process. Taking the time to understand how mortgages work and what you need to do to qualify can save you a lot of time and frustration down the road.
Not knowing your credit score is one of the biggest mistakes you can make. We already mentioned this but, your credit score is a key factor in determining whether or not you’ll be approved for a loan. And if you do, what interest rate you’ll pay. Keep in mind that you can get a free credit report from each of the three major credit bureaus once per year, so there’s no excuse to not know your score.
If you take time to prepare you will avoid another mistake and that is assuming that you need a 20% down payment to buy a home. While it’s ideal to have 20% saved up, there are many programs available that allow for smaller down payments. FHA loans, for example, only require 3.5% down.
Additionally, don’t forget about closing costs! These are fees charged by lenders and must be paid at closing. They typically range from 2-5% of the loan amount and can add up quickly if you’re not expecting them. Be sure to factor these into your budget when considering how much you can afford.
Finally, making any major purchases is another mistake to avoid when buying a house as the lenders will look at your overall debt when making a decision.
Getting Mortgage Pre-Qualification Without Pre-Approval
Mortgage pre-qualification and/or pre-approval will give you a better idea of what kinds of homes are available to you. If you pre-qualify, you will get an idea of the budget you should be working with. Home buyers often first venture out and find a house of their dreams and after that think of the mortgage while this whole process should be done the other way around.
However, some first-time homebuyers make the mistake of getting pre-qualified without also getting pre-approved. Pre-qualification is when a lender gives you an estimated loan amount based on your financial situation. Pre-approval is when a lender not only tells you how much you can borrow but also issues a commitment to lend you that amount.
The simplest way to look at this is- pre-qualification is based on estimation whereas pre-approval is based on documentation. This means that with pre-qualification, the lender may not verify your income, employment, or assets. With pre-approval, however, the lender will confirm these things through pay stubs, tax returns, and other documentation.
This gives you more negotiating power when making an offer on a home since sellers will know that you have been approved for a loan up to a specific amount.
If you think a mortgage company made a mistake with your pre-approval, be sure to contact them and go through this process once again before you start the house-hunting process.
Not Hiring a Real Estate Agent
Another one of our do’s and don’ts when buying a home that is quite common is failing to hire a real estate agent. Many buyers believe that they can save money by not hiring an agent, but this is often not the case.
A good agent will be able to help you find the right home, negotiate the best price, and protect your interests throughout the buying process. Without an agent, you may end up paying more for your home than you need to, or worse, make a mistake that could cost you thousands of dollars down the road.
You obviously don’t want to look at all the signs you bought the wrong house and could’ve got a much better one so spending a bit more on the agent will be well justified.
Not Comparing the Loan Estimate to the Closing Disclosure
When you’re in the process of buying a home, be sure to carefully review both the Loan Estimate and the Closing Disclosure. The loan estimate provides an estimate of the loan terms and closing costs, while the closing disclosure provides actual loan terms and closing costs.
It’s easy to get overwhelmed by all of the paperwork involved in buying a home. However, it’s important to take the time to review both documents so that you understand the terms of your loan and what you’ll be responsible for at closing.
If you don’t compare these two, you could end up paying more in fees than you originally anticipated. Review both documents carefully and ask your lender any questions that you have so that there are no surprises at the end.
As we mentioned many times, the mortgage is a long-term financial obligation and even seemingly small costs can add up over the years so it doesn’t hurt to be extra careful.
Consulting With a Single Lender
When you decide to consult with only one lender, you’re not getting the full picture. You don’t know what other lenders are offering in terms of interest rates and mortgage products. You also don’t know if the lender you’re working with is giving you the best deal possible.
The best way to avoid this mistake is to consult with multiple lenders. By doing this you can compare offers and make sure you’re getting a good deal. It also doesn’t hurt to go through the pre-qualification and pre-approval process with multiple lenders so you would get many offers and later on, decide on one that fits you best.
You should also be aware of many disadvantages of first-time home buyer programs like low limits or high insurance requirements, and speaking to multiple lenders can minimize these cons as well.
Saving For a Down Payment Only
Saving for a down payment is one extremely important step in this whole home-buying process. However, many people overlook other expenses.
The sooner you start saving for a down payment, the better. The longer you wait, the more you’ll have to save. Before you start, you need to have a budget in place so you know how much you can realistically set aside each month.
One of the best ways to ensure you reach your savings goals is to automate your savings plan by setting up automatic transfers from your checking account to your savings account each month.
As for other costs besides down payment you should save for, they include:
- Loan origination fee- which is typically around 1% of the loan amount.
- Private mortgage insurance or homeowner’s insurance
- Property tax
- Escrow fees
Especially if you are buying a home alone, it can be hard to save for all of these expenses and that’s why you need to make a saving plan and stick to it.
Not Checking Credit Reports and Correcting Errors
While talking about credit score and the importance it has, we said that one of the measures to ensure your score is in the best shape is by checking credit reports and correcting any errors. If you neglect this, it can lead to higher interest rates and could even prevent you from qualifying for a loan altogether.
Pull your credit report at least three months in advance of applying for a loan so you have time to correct any inaccuracies. An error on your credit report could cost you thousands of dollars in higher interest charges over the life of your loan, so get it fixed before applying for financing.
Additionally, this will also help you know the exact number so you have some time to improve it as well.
Purchasing a home is a huge investment, and there are a lot of things to consider before you make the leap. When it comes to buying a home, fixing your mistakes can be hard once you have already taken out a loan and bought a house. Don’t get pressured and make some rash decision you will then regret down the road.
This list covers some of the most common mistakes first-time homebuyers make, so if you’re in the market for a home, be sure to keep these in mind. With a little bit of planning and research, you can avoid them and end up with the home of your dreams.