Nobody wants to make any mistakes on what could be the most important purchase of their life! But how do you know if you are making a mistake? My high school history teacher, Mr Dancher, had a great point when he said, “The more you know, (…theatrical pause…) the more you know.” While this expression is obviously redundant, (and might have been a play on an Aristotle quote) it has a eery way of hinting that you are doing the right thing. You are researching!
Reading as much material as possible before spending thousands of your hard earned dollars is definitely a worthwhile investment. Here we learn about some things you definitely do not want to do when buying your first home.
Every year, first-time home buyers venture into the market and make the same mistakes that their parents, siblings and friends made when they bought their first houses.
But today’s novice buyers can stop the cycle. Here are 12 mistakes that first-time home buyers make — and what to do instead.
1. Not figuring out how much house you can afford
Without knowing how much house you can afford, you might waste time. You could end up looking at houses that you can’t afford yet, or visiting homes that are below your optimal price level.
For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won’t keep them up at night. Sometimes it’s a good idea to aim low.
How to avoid this mistake: Use a mortgage affordability calculator to help you know what price range is affordable, what’s a stretch and what’s aggressive.
2. Getting just one rate quote
Shopping for a mortgage is like shopping for a car or any other expensive item: It pays to compare offers. Mortgage interest rates vary from lender to lender, and so do fees such as closing cost and discount points.
But according to the Consumer Financial Protection Bureau, almost half of borrowers don’t shop for a loan.
How to avoid this mistake: Apply with multiple mortgage lenders. A typical borrower could save $430 in interest just in the first year by comparing five lenders. All mortgage applications made within a 45-day window will count as just one credit inquiry.
3. Not checking credit reports and correcting errors
Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.
How to avoid this mistake: You may request a free credit report each year from each of the three main credit bureaus. You may dispute any errors you find.
4. Making a down payment that’s too small
You don’t have to make a 20% down payment to buy a home. Some loan programs (see item No. 5) enable you to buy a home with zero down or 3.5% down. Sometimes that’s a good idea, but homeowners occasionally have regrets.
In a survey commissioned by AK-MLS, one in nine (11%) homeowners under age 35 agreed with the statement “I should have waited until I had a bigger down payment.” It was one of the most common regrets that millennial homeowners had.
How to avoid this mistake: Figuring out how much to save is a judgment call. A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments. The downside of taking the time to save more money is that home prices and mortgage rates have been rising, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase. The key is making sure your down payment helps you secure a payment you’re comfortable making each month.
5. Not looking for first-time home buyer programs
As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs. But don’t make the error of assuming that you have to delay homeownership while saving for a huge down payment. There are plenty of low-down-payment loan programs out there, including state programs that offer down payment assistance and competitive mortgage rates for first-time home buyers.
Yes, 11% of millennial homeowners say they regret not making a bigger down payment. But the vast majority don’t express such a regret.
How to avoid this mistake: Ask a mortgage lender about your first-time home buyer options and look for programs in your state. You might qualify for a U.S. Department of Agriculture loan or one guaranteed by the Department of Veterans Affairs that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.5%, and some conventional loan programs allow down payments as low as 3%.
6. Ignoring VA, USDA and FHA loan programs
A lot of first-time home buyers want to or need to make small down payments. But they don’t always know the details of government programs that make it easy to buy a home with zero or little down.
How to avoid this mistake: Learn about the following loan programs:
- VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. They’re for people who have served in the military. VA loans’ claim to fame is that they allow qualified home buyers to put zero percent down and get 100% financing. Borrowers pay a funding fee in lieu of mortgage insurance.
- USDA loans can be used to buy homes in areas that are designated rural by the U.S. Department of Agriculture. Qualified borrowers can put zero percent down and get 100% financing. You pay a guarantee fee and an annual fee in lieu of mortgage insurance.
- FHA loans allow for down payments as small as 3.5%. What’s more, the Federal Housing Administration can be forgiving of imperfect credit. When you get an FHA loan, you pay mortgage insurance for the life of the mortgage, even after you have more than 20% equity.
7. Not knowing whether to pay discount points
Mortgage discounts points are fees you pay upfront to reduce your mortgage interest rate. Interest rate savings can add up to a lot of money over the life of a mortgage, and discount points are one way to gain those rate savings if you’re in the right position to purchase them.
How to avoid this mistake: If making a minimal down payment is an accomplishment, the choice is simple: Don’t buy discount points. If you have enough cash on hand, the value of buying points depends on whether you plan to live in the home longer than the “break-even period.” That’s the time it takes for the upfront cost to be exceeded by the monthly savings you get from a lower interest rate.
8. Emptying your savings
If you buy a previously owned home, it almost inevitably will need an unexpected repair not long after. Maybe you’ll need to replace a water heater or pay a homeowner’s insurance deductible after bad weather.
“That’s a growing pain for the first-time homeowner, when stuff breaks,” says John Pataky, executive vice president of the consumer division of EverBank. “They find themselves in a hole quickly,” if they don’t have enough saved for emergencies.
How to avoid this mistake: Save enough money to make a down payment, pay for closing costs and moving expenses, and take care of repairs that may come up. Lenders will give you estimates of closing costs, and you can call around to get estimates of moving expenses.
9. Applying for credit before the sale is final
One day, you apply for a mortgage. A few weeks later, you close, or finalize, the loan and get the keys to the house. The period between is critical: You want to leave your credit alone as much as possible. It’s a mistake to get a new credit card, buy furniture or appliances on credit, or take out an auto loan before the mortgage closes.
Here’s why: The lender’s mortgage decision is based on your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments. Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio. Neither of those is good from the mortgage lender’s perspective.
How to avoid this mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. It’s OK to have all those things picked out ahead of time; just don’t buy them on credit until after you have the keys in hand.
10. Shopping for a house before a mortgage
It’s more fun to look at homes than it is to talk about your finances with a lender. So that’s what a lot of first-time home buyers do: They visit properties before finding out how much they are able to borrow. Then, they are disappointed when they discover they were looking in the wrong price range (either too high or too low) or when they find the right home, but aren’t able to make a serious offer.
How to avoid this mistake: Talk to a mortgage professional about getting pre-qualified or even preapproved for a home loan before you start to seriously shop for a place. The pre-qualification or preapproval process involves a review of your income and expenses, and it can make your bid more competitive because you’ll be able to show sellers that you can back up your offer.
11. Miscalculating repair and renovation costs
First-time home buyers are frequently surprised by high repair and renovation costs. Buyers can make two mistakes: First, they get a repair estimate from just one contractor, and the estimate is unrealistically low. Second, their perspective is distorted by reality TV shows that make renovations look faster, cheaper and easier than they are in the real world.
How to avoid this mistake: Assume that all repair estimates are low. James Ramos, owner of Re/Max Bay to Bay, a real estate brokerage in Tampa, Florida, recommends doubling the estimates to get a more realistic view of costs.
Seek more than one estimate for expensive repairs, such as roof replacements. A good real estate agent should be able to give you referrals to contractors who can give you estimates. But you also should seek independent referrals from friends, family and co-workers so you can compare those estimates against ones you receive from contractors your agent refers.
12. Underestimating the costs of homeownership
After you buy a home, the monthly bills keep stacking up. This can come as a surprise if you’re not ready.
“It’s not just your mortgage payment,” says Seth Feinman, vice president of Silver Fin Capital, a mortgage brokerage in Great Neck, New York. “You’re going to have the oil bill, the gas bill, you’re going to have a cable bill, you’re going to have all these things that the bank doesn’t care about when qualifying you for a mortgage.”
Renters often pay these kinds of bills, too. But a new home could have higher costs — and it might come with entirely new bills, such as homeowner association fees.
How to avoid this mistake: Work with a real estate agent who can tell you how much the neighborhood’s property taxes and insurance typically cost. Ask to see the seller’s utility bills for the last 12 months the home was occupied so you have an idea how much they will cost after you move in.
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