If you’re a first time homebuyer, it can be an overwhelming process. Your home is likely the largest purchase you’ll ever make, and so it’s important to do it right. Here are 12 first time homebuyer mistakes and how to avoid them.
1. Going with the first lender you speak to
People will often go with the first lender they speak to, and that could be one of the biggest first time homebuyer mistakes.
The problem: Failing to draw comparisons between lenders could cost you thousands of dollars in the long run.
The solution: It’s prudent to compare at least 3-5 different lenders, as well as consult with a mortgage broker. When you do, compare rates, loan terms, and lender fees. It can also benefit you to pay attention to their customer service quality and responsiveness to gauge how smoothly your mortgage application process will be.
2. House hunting before securing a mortgage
Searching for your first home is so exciting, but many first time buyers rush to find their dream home before getting their ducks in a row – and end up disappointed.
The problem: Particularly in areas with a competitive housing market, you could lose out to more organized buyers if you aren’t preapproved for a mortgage. You may also be shopping for homes outside of your budget.
The solution: Get pre approved! Shop around, decide on a lender and get a fully underwritten pre approval letter in place before falling in love with a house. That way, you’ll know your budget to shop within, and be well-placed for making your move when you find the perfect home.
3. Going over budget
It’s all too easy to fall in love with a first home that’s just a smidge over your agreed budget, but overextending yourself can really leave you out in the cold in the long run.
The problem: Buying a home for the first time is a big commitment, and it’s important to take that responsibility seriously. Unforeseen financial difficulty could expose you to even higher risks of foreclosure if you’ve stretched your budget too far.
The solution: Focus on what monthly payment is comfortably affordable to you instead of fixating on how much lending you qualify for. Also, be truthful with your lender as to your current financial situation, so they can accurately assess how much you can afford.
4. Prioritizing cheap over value
Property is an investment that, when done properly, can certainly make you money. However, buying cheap is not the key – buying value is.
The problem: It is always possible to find cheap properties in undesirable locations or adjacent to motorways, but in many instances, you’ll be stuck with an undesirable property that won’t increase in value.
The solution: When you do find a property you like, don’t base your offer on the asking price – get a comparative market analysis from your real estate agent. Do some of your own research too. Consider that information in addition to the realistic potential of the area when making an offer.
5. Thinking you have to save a 20% down payment.
The common belief that the only way to purchase a property is to make a 20% down payment is largely a myth. According to the National Association of Realtors, the median home down payment is 12%, and closer to 6% for first time buyers.
The problem: Trying to save up 20% could take many years, especially for millennials with little resources.
The solution: Shop around for mortgage options. Some lenders will accept as little as 3% as a down payment so long as you purchase private mortgage insurance. Keep in mind, though, private mortgage insurance can be anywhere from 0.5-1.5% of your home’s value, which can definitely add up. Additionally, if you provide a larger downpayment, you could be eligible for better interest rates.
6. Not fully understanding homeowners insurance
Most lenders will insist you take out homeowners insurance, but many first-time buyers do not take the time to fully understand their options.
The problem: Without due diligence, many buyers will find themselves either under-insured or overspending on unnecessary coverage. Insurance is a boring subject easily overlooked until chaos strikes and your home incurs damage that isn’t covered.
The solution: It’s important to take the time to not only shop around for the best price, but also do your research on home insurance coverage too. Carefully consider your need for fire, theft, riot, and vandalism coverage. Additionally, check for extra inclusions such as temporary accommodation in the event of significant property damage.
7. Having too much credit card debt
Your debt to credit ratio is an important metric lenders consider when deciding whether or not to offer you a mortgage. If you have too much debt in relation to the amount of credit you had, it could impact your ability to secure a home loan.
The problem: Lenders pull credit reports both at the pre-approval stage and just before closing too. Not only do you have to have good credit to get pre-approved, but many first time buyers don’t realize you should avoid taking out credit before closing.
The solution: To qualify for a home loan make sure you have a good debt to credit ratio. Additionally, to protect your hard-earned pre-approval status, do not take out any other loans or credit prior to closing on a property.
8. Choosing a house over a neighborhood
Sure, the house needs to feel like home, but once you’re all cozied up in your new home, it’s a bit late to realize that the neighborhood isn’t what you wanted.
The problem: Ending up with a house you love in a neighborhood you hate is a disaster. Unless you never leave the house, you will be compromising your overall happiness by not fully considering the area you are choosing to move into.
The solution: Real estate agents can assist you in comparing areas based on schooling and safety statistics, as well as amenities and general location in relation to broader accessibility. Your chosen area ideally needs to feel like a good fit to you personally, where the culture and values match yours. Before deciding upon a place, take a drive and a walk around the area and see for yourself if it could truly feel like home. If you need help you can get our home buying checklist.
9. Assuming you are not eligible
Little-to-no savings and poor credit scores can leave first-time buyers feeling that there is no hope, especially after being turned down for a conventional loan.
The problem: This predicament can lead to first timers feeling defeated, throwing the towel in completely, and delaying their home search by years unnecessarily.
The solution: It is well worth looking into one of three government-insured loan programs available. These programs all provide potential assistance to moderate-to-low income borrowers wanting to buy a home with little savings and/or poor credit. These loans are backed by the Federal Housing Administration (FHA loans), the U.S. Department of Veterans Affairs (VA loans) and the U.S. Department of Agriculture (USDA loans).
10. Ignoring routine maintenance
One or two walkthroughs before purchasing a home can give you a good idea of any major issues that need your immediate attention. However, there is often much more to being a homeowner than most first-timers realize.
The problem: Having no experience owning your own home and being preoccupied with moving in can lead to routine maintenance oversights that can prove costly. If left, some property maintenance issues can become extremely expensive to fix.
The solution: Implement a weekly cleaning schedule. Take note of things that need to be repaired both inside and outside as you do. Schedule routine maintenance, and fix problems quickly as they arise.
11. Not budgeting for additional expenses
Buying and moving into a new home is expensive, but first home buyers should also have a savings account to pay for unforeseen additional expenses.
The problem: Just when you thought you’d accommodated for all buying and moving in costs, a leak appears in the roof. As soon as that’s attended to, a washer needs fixing. Unforeseen property costs can put immense strain on an already tight budget.
The solution: Set aside some emergency/property maintenance funds. Experts suggest saving between 1% and 3% of the property’s purchase price each year to develop a safety fund. For example, if you paid $300,000 for your new home, aim to save at least $3,000 each year to maintain it.
12. Making other major life changes at the same time
It can be hard to grasp the enormity of something like buying a new home and moving for a first-timer. For most, it’s more stressful than they imagined, and not expecting that can lead some to add more pressure than is necessary.
The problem: The excitement of buying a new house and the naivety of being new to it can lead some to throw in other life-changing events at the same time. This can seriously overwhelm and potentially ruin what could otherwise have been a reasonably enjoyable experience!
The solution: If at all possible, try to anticipate the likelihood of some stress as you (and your partner/family) adjust to the big move and all that it entails. Ideally, hold off on weddings and babies until you are truly settled into your home-ownership life!
Buying your first home can be daunting, but it can also be a wonderful experience. Prepare yourself as best you can for what to expect when you first move in and for the initial adjustment period. Anticipating some often-overlooked challenges can prepare you well for a great experience. Good luck!