Buying a home is an exciting journey, but it can come with a lot of pressure.
A home purchase represents the biggest investment that most people will ever make, and the result can also determine your quality of life for years to come.
There are so many pieces to the process that even veteran buyers can feel overwhelmed. But for first-time home buyers, a lack of knowledge can lead to major oversights and costly blunders.
In other words, what you don’t know can hurt you.
To help you get the most for your money, we’ve listed five of the most common first-time homebuyer mistakes, along with advice on how to avoid them.
Breaking Your Budget
Before hitting the road with a realtor, create a budget that features a cap on how much you can afford to spend.
Subtract all your monthly expenses (rent, car payments, utilities, food, etc.) from your monthly take-home income to arrive at a monthly mortgage payment you can comfortably pay.
The key word there is “comfortably.” Keep in mind that, whether you buy a one-family house or a condo unit, you will now be responsible for financing repairs and regular maintenance (something many renters take for granted).
Many experts swear by the “1 percent rule,” which says you should set aside one percent of your home’s purchase price every year for ongoing maintenance and repairs. (So if your home costs $200,000, you should budget $2,000 per year.)
Another rule of thumb is that the monthly mortgage payments should not exceed 28 percent of your monthly pre-tax income. If you have a heavy debt load, that figure should be lower.
This may seem like no-brainer advice, but if you visit nice homes that are near (or above) your cap, you could be tempted to bust your budget. Many people do, and it rarely works out well
Failing to Get Preapproval
Getting preapproved for a mortgage gives you a leg up when bidding for homes.
Basically, a preapproval letter from a lender states that your credit rating and ability to pay have been vetted by an underwriter, which has determined that you qualify for a loan of X amount.
Preapproval assures sellers that they aren’t wasting their time with someone who may not get financing. Without it, you may have trouble competing for desirable properties because many – if not most – other bidders will have preapproval.
But don’t make the mistake of confusing prequalification with preapproval.
Prequalification is simply an estimate of how much a lender might give you. It’s not a guarantee that you’ll get a loan, though it can help you set a realistic budget (and expectations).
Even preapproval doesn’t guarantee a loan. If you try to purchase a home that doesn’t meet the lender’s guidelines, or you reduce your credit score before the closing (e.g., by buying a new car), the lender might balk.
If at all possible, delay any major purchases, including furniture, until after the closing.
Foregoing the Home Inspection
Because home inspections are not mandatory, but are one of the “extra expenses” attached to the home purchase, some buyers think, “Meh, let’s skip it. The place looks fine to me.”
[Cue game show buzzer.] Wrong answer!
Never skip the home inspection.
Even if you know a little something about plumbing, carpentry, electrical wiring and HVAC systems, you could easily miss critical flaws in the house, especially if it’s an older building – problems that could cost thousands of dollars to repair.
Why risk having to pay for repairs yourself?
If the home inspector detects problems, you can use this information to negotiate a lower price for the house. If no defects are found, you’ll have more peace of mind when budgeting for other expenses.
Failing to Comparison Shop for a Lender
Interest rates, fees and terms offered by different financial institutions can vary widely, so it’s important to shop around for a lender willing to give you the best deal.
At a minimum, contact three lenders to inquire about their rates and terms, and to ask questions. Some of the most basic questions include:
- How long are the typical turnaround times on preapproval, appraisal and closing?
- What lender fees must be paid at closing?
- Can the lender waive any fees or roll them into the loan?
- Are points included in the quote? (Points are fees paid to the lender in exchange for a lower interest rate.)
- What are the downpayment requirements, and how much be put down to avoid buying Private Mortgage Insurance (PMI)?
- If an “earnest money” deposit must be made to start the loan process, under what circumstances does the lender get to keep the deposit?
- Can the interest rate be locked in, and if so, for how long will the lender honor that rate?
A good lender will communicate regularly, and work closely with you to help you choose a mortgage product that meets your individual needs.
Not Hiring Your Own Realtor
First-time home buyers who don’t hire their own real estate agents are like newbie acrobats who walk the high wire without a net. Both may be headed for a big fall.
Good real estate agents are more than “house tour guides.” They are more like consiglieres – people who will serve as trusted sources of advice and information, and will also fight to get you want you want.
In addition to helping you find – and close on – a home that meets your specifications, a real estate agent is ethically bound to look after your best interests.
Of course, you could simply work with the seller’s agent, who is also ethically obliged to look after your interests, but let’s face it: because the seller is the one who hired this agent, the realtor will probably put the seller’s interests ahead of yours (consciously or unconsciously).
And when you’re trying to navigate a process as complicated as home buying, you really want someone who’s 100 percent on your side.