First Time Home Buyer? Avoid These Common Mistakes
Most people start out their lives renting; moving from apartment to apartment, always on the hunt for lower rent and more amenities.
But at some point, you’re sick of paying some landlord every month to breathe down your neck while you live in a space that you don’t legally own.
And at this point, you (and your spouse/partner if you have one) are bringing home more bacon than you know what to do with.
So you/you guys decide that it’s time to begin house shopping.
But the home-buying process is not as simple as
- Find a half-decent place
- Send an application
- Provide documents
- Sign the lease/pay security deposit
- Move in
Home-buying is a much more complicated process…
A process filled with a seemingly endless number of mistakes to make and pitfalls to fall into.
Many first-time homebuyers fail to prepare adequately and it ends up costing them thousands of dollars and hours of wasted time.
If you don’t want to be out thousands of dollars and tons of time, avoid these rookie home-buying mistakes.
1.) Failing To Shop Around For Lenders
One of the most critical errors first-time homebuyers make is taking the first mortgage offer that comes their way.
Maybe they aren’t aware of large fluctuations in mortgage offerings, or maybe they’re just too lazy to browse the market.
Either way, failing to spend time looking for the best rate leaves tons of money on the table.
In fact, interest rates between lenders vary so greatly that you could save hundreds to thousands per year depending on the size of your mortgage! Checkout free websites like LendingTree to check out and compare different lenders as well as interest rates.
Homebuying is a long, complex process; you don’t want to cut corners out of laziness.
Take as much time as you need to find the best possible mortgage.
Instead of trying just one lender, visit at least 3. You’ll notice the difference in offers they’ll give you.
2.) Buying Something Outside Your Budget
A personal finance cornerstone is always living within your means.
When it comes to houses, this can be difficult.
Even more so when you find the most gorgeous house but see that its price tag is quite high.
Now, maybe the banks qualifies you for a large mortgage that’s typically be stretching your budget.
While this may be tempting if you think you’ve found your dream home, don’t do it.
Instead, look at what you’d pay monthly and see what you can afford.
Also, as we’ll mention later, there will be other home ownership costs to account for.
3.) Failing To Inspect Your Prospective Home
You’d be a fool to make such a large financial commitment without inspecting what you’ll be buying.
It is imperative that you cut no corners when it comes to inspecting your potential future home, as there are a lot of things that make up a house.
First, before inspecting the exterior of the building itself, take a walk around the land that’s part of the home. Take note of anything that could pose potential dangers, such as large trees being too close to the house (dangerous in a storm).
And don’t just do this when the weather’s nice; you’ll want to know that the drainage around the house is effective and allows water to stream away from the house rather than towards it.
Once you’ve walked the grounds, inspect the exterior for any cracks or flaws. This isn’t just for aesthetic purposes; cracks and holes in the wrong places could allow rainwater to flood areas of your home or provide little critters to create a home of their own inside.
Finally, go into the house and look at everything closely; leave no stone unturned.
Be liberal about recording damages. If you see anything that you think needs to be fixed up or that might affect the home’s value, make a note of it.
Damages that give you some negotiation room include
- Cracks in walls/cabinetry
- Termite infestations (can happen in the attic where there’s lots of wood)
- Problems with electrical wiring
An important thing to note is if your seller is selling the home “as is”; if they are, you can’t do much if the house is dirty or has stuff the seller is too lazy to take with them.
But if they aren’t selling it “as is”, you can ask that the seller clean the place up and clear out their unwanted belongings.
Now, some damages aren’t cause for a lower price. For example, it’s expected that when new homeowners move in, they do any repainting. It’s not on the seller to paint the interior for you.
4.) Not Considering Closing Costs And Other Fees
The house’s sale price isn’t the only thing you’ll be paying upon initial purchase of the house. Closing costs – the fees you pay when the title of the home is transferred to you during closing – can be quite a hefty sum.
Some common closing costs include:
- Application fee – You don’t usually pay this until you close on your new home
- Appraisal fee – To learn the actual market value of the home
- Attorney fees – If you used an attorney to help you traverse the buying process, you’ll have to pay them
- Closing fee – Paid to the title company/escrow company/attorney to compensate them for overseeing the closing process
- Home inspection – If you didn’t do this yourself
- Prepaid interest – if interest accrues between closing and your first mortgage payment
- Private mortgage insurance – If you didn’t put down enough, you’ll need to pay PMI; The first payment is usually due upon closing on the house
- Transfer taxes – Paid when moving the title from the seller to you
Closing costs can run you up to 5% of your home’s price; so aside from saving for a down payment of 20%, you’ll want to pad your savings account with several thousand extra dollars.
5.) Not Ensuring Your Credit Report Is Clean And Strong
Houses cost a lot of money relative to most other purchases; thus, banks are taking large risks when you promise to pay back $250,000 and interest over decades.
You need to make sure your credit score is strong and your report is free from errors.
First of all, scan your credit report for any errors. Dispute all these errors as much as you can to clean up your report and give your score a slight boost.
Then, after you’ve been preapproved for your mortgage, don’t open any new credit accounts.
In addition, pay down some of your credit card debt and keep making your payments on time.
Lenders like clean and strong credit reports and they don’t like to see big changes in credit history as closing approaches, so do these things to ensure a smooth homebuying process. If your credit is not as high as you would like, think about trying to improve your credit score before you start searching for a home.
6.) Making Too Small Of A Down Payment
In a perfect world, there’d be no down payment.
Both you and the bank/seller would know right away whether or not you can afford to pay the full cost of the house.
Unfortunately, the bank/seller can’t see the future; to hedge against losses, they require a sizeable down payment on the house before you can get a mortgage.
Also, putting down a sizeable down payment demonstrates that you have the financial means to pay back the bank or seller.
Typically, lenders require a minimum down payment of 20% of the house.
That’s $60,000 for a $300,000 house.
Whoah; you could get yourself a luxury vehicle with your down payment.
But a down payment of 20% is the recommended minimum for a few reasons:
- You’re much more likely to get a mortgage in the first place
- You start off with significant equity in your home (aka you own 20% of your home already)
- Your interest rate is lower
- You have less principal to pay, meaning lower monthly payments
- You avoid other costs and fees, like private mortgage insurance (PMI)
As you can see, putting such a large amount of money down could actually save you money in the long run.
Not to mention simplify the home-buying process a bit.
Still, if you feel like that down payment is pretty hefty, read this article we recently wrote detailing multiple ways to save on your down payment.
7.) Failing To Consider The Cost Of Owning A Home
Ok, you’re all moved in!
Wait… you have to pay property taxes now?
And what’s this “homeowner’s association” that I have to send money to?
These are some costs you need to know of before choosing your first house.
As a renter, you probably didn’t even think about these until now.
You’re used to the usual:
But even these familiar costs change when you own a home.
And by “change”, we mean drastically increase as your house is probably larger than your former residences.
Some new costs you might/will need to pay are
- Homeowner’s insurance
- Property taxes
- Internet (usually rental houses require you to get internet, so you might be used to this)
- Lawn care (mowing, trimming, etc.
- Upkeep (it’s your house, not the landlords!)
- Homeowner’s association fees
- Selling costs (if you eventually move out)
Owning a home is expensive, so make sure to have plenty of cash beyond your down payment and mortgage payments.
Home Buying Is Complicated… But Easier When You Know These Common Mistakes
Buying a house is not a quick and easy process; with every step you take, there are numerous financial and temporal pitfalls.
Avoid making these crucial errors when buying a new home, and you’ll have more peace of mind while saving many thousands of dollars and many hours of your time.