11 Mistakes Every First-Time Homebuyer Must Avoid

Buying a home is an investment, and every prudent investor appreciates the need to avoid making mistakes. However, mishaps or blunders are not uncommon, but you can identify some obvious ones that are avoidable. The same goes when purchasing a home because such blunders can cost you dearly.

Mistakes can cost you thousands of dollars, impact your mortgage loan prospects, or significantly contribute to losing your newly acquired dream home. Therefore, it is best to ensure that you run on the right track and pace. Thus, we have compiled several mistakes worth avoiding as a first-time homebuyer.

1. Buying More House Than You Can Afford

Pre-approval on your mortgage application can help determine the maximum amount you qualify to borrow. But experts recommend focusing on the monthly payments to ensure you will spend more than 30% of your monthly income on mortgage payments. Take the time to review the loan and terms before making any decisions.

Assess all your income streams to know the impact 30% will have on your monthly finances. Alternatively, you can use an online mortgage calculator to discover what that number is and if it sits well with you.

It also is wise to consider potential extra costs that come with homeownership. Homeowner’s insurance, maintenance, property taxes, repairs, utilities, and hazard insurance become the new norm once you shift from renting. Private mortgage insurance might also be necessary depending on the loan down payment amount. Everything adds to your monthly and annual expenses.

Here are some handy tips to help you lower the risk of making mistakes during your calculations:

  • Consult your lender and agent, asking for help. The lender will break down the monthly cost estimates you can expect while the agent provides accurate information about the utilities and property tax.
  • Shop around to get insurance quotes for comparison to help you find the companies with the best rates.
  • Keep some money aside to cover maintenance and repairs. The savings will be a rainy-day fund to ensure you do not find yourself in a bind when you have repairs and maintenance costs, which could be roughly 1% to 3% of the purchased property’s price.

Qualifying for the mortgage does not mean you can comfortably honor the monthly payments, even if the lender qualifies you for the loan. Therefore, it is best to ensure you have a concise estimate of the monthly payment amount from the lender before processing the loan or buying the property.

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2. Not Shopping Around for Your Mortgage

Sourcing quotes from different lenders is essential to making the right investment decisions when buying a property. You could avoid spending much money on up-front fees and high-interest rates and avoid making the buying process costly and lengthy.

According to a recent mortgage agency Freddie Mac report, buyers can save nearly $3,000 over their loans’ tenures if they ask five lenders to inquire about their rates.

Let this be your starting point, even if you have a trusted friend or your real estate agent refers to a lender. Reach out to different lenders (at least three) and request quotes from each to compare the interest rates, fees, and other associated costs attached to the loan. Furthermore, you must consider overall customer services, responsiveness, and other intangible elements that signify the lender will be the best option.

Many homebuyers risk losing thousands or millions of dollars by not shopping for quotes on mortgage loans. Please do your best not to be among that statistic.

3. Conduct A Home Search Before Getting Pre-Approved for a Loan

Pre-approval is a crucial initial step in the process because it gives a price range you can use when you start shopping for lenders. Once you have the pre-approved max loan amount and associated monthly payment you find comfortable, you can revise your list to the best potential properties and narrow your search further.

The loan pre-approval also distinguishes you from other homebuyers as sellers are confident in your offers. The pre-approval letter can prove vital, especially in a particularly hot real estate market with many bidders for a property or home you are eyeing.

4. Delaying Your Home Purchase Due To The Down Payment

Down payments on a mortgage loan are a scary prospect for many borrowers. They wonder if they can afford to pay thousands of dollars as a lump sum. Hence, few buyers are comfortable with putting down such amounts.

A 20% down payment might seem like a steal because it can help avoid private mortgage insurance. However, it is not a requirement when purchasing a home. A buyer can purchase a house with as little as a 3% down payment. Fortunately, down payments are a necessity. Building your savings to ensure you can afford to put down 20% can be a regrettable mistake.

Trying to save that much limits your cash flow and impacts the much you can save for other things like retirement, offsetting other debts, your kid’s education, or other financial goals. And it can prove an uphill task if you have rent, utilities, and other bills to consider.

Research down payment assistance programs and low-down-payment mortgages if your financial situation is why you are delaying homeownership. You will find options that will help you avoid pushing forward your dreams of owning a home.

5. Not Brushing Up On VA, FHA, And USDA Loans

The traditional mortgage might be the most common option that comes to might for many first-time homebuyers, but it is not the only option. Many of these conventional loans have stringent income and credit requirements and often require a substantial down payment. So, what other options can buyers consider when searching for favorable loans?

You can look to the following if you want a lower upfront home purchase cost, have a less than desirable credit score, or are strapped for cash:

  • VA Loans: Veterans Administration (VA) loans are primarily packed for those in the military, vets, and their immediate families. VA mortgages do not require upfront payments, and some do not have closing costs.
  • FHA Loans: The loans have the Federal Housing Administration’s backing and require a 3.5% down payment. Borrowers with a 580-credit score qualify for FHA loans.
  • USDA Loans: The United States Department of Agriculture guarantees these mortgages designed for homes in designated rural areas. USDA loans do not have down payment requirements.

Any of these might be the right option for you, but you also must consider your credit score, income, upfront payment, potential area for saving, and other factors. Reach out to a reputable mortgage loan office or broker to help you understand the various options and which is the most suitable for your situation.

6. Not Having Documented Records For Gift Money

Experts recommend getting your plan together early if you expect financial assistance from loved ones (parents, siblings, cousins, etc.) to help you buy a house. Determine how much they intend to contribute and when they will transfer the funds. Will they write a check or give you cash? Will they be comfortable with documenting the transactions for future reference?

Being armed with such essential details up-front can help you avoid being thrown off the mortgage loan or property purchase if things do not pan out. That is why you must have clear information regarding how much you will receive and when. It helps you account for the total amount you will have before approaching your lender.

7. Failing To Negotiate A Homebuyer Rebate

Most real estate agents or brokers work on a commission basis. They deduct a 6% to 7% commission from the amount the listing agent gets when the house sells, and half of that goes to the buyer’s agent.

It has been the nature of how the game is played in the real estate market for a long while, but full-service realtors will soon have limited bearing in the whole picture. Buyers are not savvy and can source listings, identify open houses to attend, and schedule showings without consulting agents unless they need help drafting contracts or negotiations.

The commission (rebates) is roughly 1% of the sale price, meaning an agent can Bag $3,500 on a $350K house. And with the hassle of the process reduced, many real estate agents are ready to return a portion of their commission fees to the buyer, what’s known as a commission rebate.

Some realtors and real estate companies openly advertise the rebates on their websites and promo materials. However, it is best to negotiate with the agent to ensure that you have secured the rebates. Also, please note that the rebates are not available in every state. Places like Mississippi, Alabama, Oklahoma, Alaska, Tennessee, Iowa, Missouri, Oregon, Kansas, and Louisiana do not have rebate plans. In regions where buyers can enjoy rebates, homebuyers can enjoy more cash to put towards closing costs, buying new furniture, moving houses, repairs, and more.

8. Not Checking Your Credit Score First

A sound credit score can have a significant influence on your home purchase. Retrieve your annual credit report from at least three major credit reporting bureaus like Equifax, TransUnion, or Experian before you start searching for properties. Also, take the time to check with your credit card provider and bank to understand your financial situation. Many have credit monitoring services you can use to ensure you are current with your credit score.

Consider delaying the home purchase from some months to work on your credit if you have a less than desirable score or it needs a bit of improvement. Gaining a couple of points can improve your odds of getting a lower interest rate and favorable lifetime costs on your mortgage loan.

Some strategies worth considering to get the ball rolling when improving your credit score include:

  • Avoid closing accounts after you have paid them off.
  • Avoid applying for new loans or cards.
  • Automating your bills to help prevent missed payments.
  • Settling existing debts are paying off your credit card balances.
  • Reporting any errors that soil your credit report.

9. Putting Too Much or Too Little Down

Determining the upfront fee can prove tricky. For instance, if your down payment on an FHA loan is too little, you risk getting stuck with private mortgage insurance payments that can be up to 1% of the annual loan amount. It calls for understanding the elements in the loan type you are considering to ensure you do not find yourself between a rock and a hard place.

It is possible to cancel mortgage insurance on conventional loans after you achieve 20% equity on the home you buy. However, that same is not possible when you opt for FHA loans. It would be best if you footed the extra costs until you decide to refinance the mortgage or sell the property.

It also is possible to pay too much when putting down the upfront amount. A 20% down payment could see you avoid mortgage insurance, but it might not be the best move if it depletes your savings or renders you cash-poor.

Experts recommend having a solid rainy-day fund, especially if you are a first-time homebuyer. It cushions you against unexpected expenses like repairs.

10. Buying a Home That Doesn’t Compliment Your Long-Term Needs

Buying a house is a significant investment, and selling it carries a similar impact. Therefore, it is best to pick a property that will suit your long-term needs and expectations to avoid selling. Consider your life ambitions. Are you planning on expanding the family? Are you thinking of building a swimming pool or setting up a vegetable garden? Include such things in your checklist to ensure you make the right choice when picking the property to buy.

Selling your home can cost up to 10% of its market value depending on local customs and taxes (meaning you lose $3500 when selling a $350K property). That is why selling can be considerably expensive. So, by buying a home, you can hang onto it for ten or more years.

Furthermore, you risk paying more out-of-pocket when you sell a home too soon after purchasing the property. We are not suggesting you live in the house forever, but long enough. You can then opt to rent it out and make some money from it or sell it years later. Renting is an excellent way of avoiding the monotonous listing and selling process.

11. Getting Too Emotional and Attached About One House

Getting excited and passionate about the dream property you find is understandable. However, it is not wise because getting too sentimental about the home impedes the chances of striking a good deal. A buyer might spend $20K over the asking price because they love the property and do not want it going into another buyer’s hands.

Furthermore, the appraisal might fail to measure up, meaning the lender cannot cover the total buying price, leaving the buyer footing the difference. The buyer might not recoup the money if they decide to sell the home quickly, risking making significant losses due to the extravagant buying price. Moreover, a buyer could stretch their budget too thin because they offer more than the asking price and end up with higher monthly payments.

The Verdict

When buying a house, different moving parts are at play; hence, avoiding these mistakes as a first-time buyer is only the tip of the iceberg. Every decision you make impacts another, meaning a minor slip-up or change can significantly impact your purchase power. Therefore, have a clear picture of your financial situation before diving in; shop around to get quotes from different lenders, consult your agent, and ensure you are well informed before making any decisions.