Thinking about buying your first home? Before you can unlock the door to home ownership, you have to take some important first steps. From finding the perfect location to financing your purchase, shopping for your first home has challenges that go beyond curb appeal and interior features.
Some of the important steps to home ownership include:
- Getting approved for a mortgage.
- Choosing the right real estate agent.
- Finding the right home that fits your budget.
Here are 5 common mistakes first-time home buyers should avoid.
Many first-time home buyers decide to buy when they feel ready for a mortgage. But just because they can afford the mortgage payments doesn’t mean they can afford to own a home.
1. The other expenses
Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time home buyers tend to overlook when shopping for a place. Keep in mind property taxes and insurance have a tendency of going up every year. Even if you can afford it now, ask yourself if you’ll be able to afford the increased costs later. Even though it’s your first home, you must think of it as a long-term commitment. If you have to switch jobs in a year or two, and may have to move for the job, you should think twice. Ideally, you should picture yourself living in that house for 5 to 7 years.
Home buying doesn’t begin with home searching. It begins with a mortgage pre-qualification — unless you’re lucky to have enough money to pay cash for your first house. Often, first-time home buyers are afraid to get pre-qualified. They fear the lender may tell them they don’t qualify for a mortgage or they qualify for a loan smaller than expected. So they pick a price range out of the sky and say, ‘Let’s go look for a house’.
2. First things first
And that’s not how it should be done. Yes, it’s more fun to go look at houses than to sit in a lender’s office where you have to expose your financial situation. But that’s a backward approach. You get pre-approved, and then you find a home. That way, you’ll make a financial decision versus an emotional decision.
New to the home buying game? You’ll need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer. Venturing into this process alone, without professional help, is not a good idea.
3. Get references
If you hire an agent without a referral from friends or family, ask the agent to provide references from previous buyers. The same goes for loan officers or mortgage brokers. It’s very hard for first-time home buyers because they don’t know who they are dealing with. It’s crucial to find a professional who will give you truly independent advice. You are about to make what is possibly the largest single investment of your lifetime. You want to make sure it’s done right.
Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time home buyers make. Some people scrape all their money together to make the 20% down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all.
4. It’s risky to deplete savings
Home buyers who put 20% or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge unless you have a reliable safety net. Everyone — especially homeowners — needs to have a rainy-day fund. You have pre-qualified for a loan. You found the house you wanted. The contract is signed and the closing is in 30 days. Don’t celebrate by financing another big purchase.
5. Why you should keep your wallet shut
Lenders pull credit reports before the closing to make sure the borrower’s financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing.
Buyers, especially first-timers, often learn this lesson the hard way. They sign the contract and they want to go buy new furniture for the house or a new car. It changes your debt to income ratio and now affects your affordability and can easily stop you from making your dream of home-ownership a reality!