9 Avoidable Mistakes First-Time Homebuyers Often Make
Buying your first home is a big financial and lifestyle decision. While your lender and real estate agent will help guide you through the process of buying and financing the property, there are certain things a first-time homebuyer should be aware of throughout their homebuying journey. Here are eight common mistakes to avoid making when buying your first home.
Skipping the Pre-Approval Process
This is the first thing any prospective homebuyer needs to check off their to-do list. Many homebuyers assume what they can afford without consulting with a lender first.
A pre-approval is a relatively quick and easy process. Your lender will run your credit score and compile a loan application with the information you provide regarding income, employment history, assets, etc. The lender will analyze the info and issue a decision on whether or not you are eligible for a loan. If you're qualified, the lender will issue a pre-approval that states your qualification subject to verification of the information your provided and the purchase property.
Keep in mind that many real estate agents won't write a purchase offer for you without a pre-approval. Click here to learn how to prepare for your pre-approval.
Not Knowing Their Credit Circumstance
People who know their credit scores feel significantly more prepared to buy a home than those who don't know their credit score, according to an Experian survey. Your credit score affects your loan eligibility and affordability, making credit awareness a must.
If you know you want to purchase a home in the near future, get a copy of your credit report. Just be wary of online credit checks; they often only represent one of your credit scores and could mislead you to believe your score is higher or lower than it actually is.
Forgetting the Other Financial Aspects of Owning a Home
Mortgage affordability weighs on multiple factors, including annual gross income, mortgage rates, mortgage insurance, home type, credit history and score, fees and closing costs, etc. While your lender will use ratios, like debt-to-income, to determine how much you are allotted to borrow, it's important to determine what you are comfortable paying monthly.
Not only will you have a monthly mortgage payment but utility and maintenance costs, as well. It’s likely you’ll also need to make some hefty purchases – furniture, appliances, paint – after purchasing a home. Take a look at your own financial picture, plans for the future, debt, etc. and discuss with your lender and real estate agent what a healthy home price looks like for you.
Valuing a Home Above Its Location
When it comes to determining property value, what are the three most important factors? Location, location, location. Home value is largely influenced by location because of schools, job opportunities, nearby amenities, noise levels, surrounding homes, etc.
Love a prospective house but hate the location? Remember to look beyond the home itself. Physical structure depreciates over time and aesthetics of a home can be changed. A home in a great location will give you an advantage for a profitable resale in the future.
Not Considering Other Costs
Closing costs typically range from 3 to 5 percent of your home's purchase price. These costs and fees include items related to your home purchase. Depending on your loan type, you may have to pay these costs at closing (on top of down payment) or they can be structured into your mortgage.
There are ways to minimize your closing costs, but it's also important to keep in mind future costs of home maintenance and utilities, as mentioned before.
Picking the Wrong Real Estate Agent
Your home is likely the largest purchase you'll make in your lifetime, so don't pick a real estate agent blindly. The best way to find a compatible agent is to ask friends, family, and/or your mortgage lender for a referral.
First-time homebuyers are typically more time-consuming than repeat buyers, so you'll want to find an agent who is available to meet your home search needs and answer all of your questions along the way.
Not Being Flexible with Your "Wants"
It's also important to keep an open mind throughout your home search. Sit down and create a list of "must haves", "wants", and "deal breakers". Share this list with your real estate agent, and remember that your goal is to be able to afford your needs in a home and check off some of your "wants". Flexibility is essential.
Getting Attached Before the Inspection
You've found the perfect home and have an accepted purchase offer, but before you delve into what color you're going to paint the living room, you'll want to see the results of the home inspection. A home inspector will examine and evaluate the major systems of a home, including the electrical system, water heater, foundation, etc. Ask yourself if your potential purchase property would still be "perfect" if there was a major underlying foundation issue?
Home inspections are meant to help buyers assess the condition of the home and possibly indicate any future upkeep costs. Keep in mind your list of must-haves, wants and deal breakers before getting too attached.
Making Big Purchases Before Closing
We get it; you’re excited – you’re buying a house and it needs furniture! Opening up a new line of credit before closing is a huge “no” for two reasons. Another inquiry on your credit report could drop your score, potentially affecting your mortgage interest rate and qualification status.
Secondly, racking up debt on credit cards could affect your debt-to-income ratio and knock you out of qualifying for your mortgage altogether. Consult with your mortgage banker before making any major decisions regarding your finances, credit and/or employment situation.
For more information about buying your first home, download our free Mortgage 101 Handbook, a great resource with everything you need to know about home buying and financing.