Few things compare to the thrill of buying your first home. It’s an exhilarating experience – whether you’re buying a condo, townhouse, McMansion, minimalist, simple-sized home, or something in-between.
But if this is your first rodeo, it can be almost overwhelming trying to dot all of the i’s and cross all of the t’s. While first-time home seller mistakes are also pretty common, at least these individuals have the experience of buying a home.
These are some of the first-time homebuying mistakes to avoid.
Rushing the Process
We get it: there’s a major shortage of available homes in the U.S., so when you see one that you like, there’s a temptation to move at the speed of light in your quest to beat other buyers. However, JR Russell, head of consumer lending at Citi, warns against rushing into anything. Instead, he recommends moving at the pace that’s right for you. “Some people in the industry may tell you that you need to get qualified or under contract ‘immediately’ in this ‘super-competitive’ market, but it’s much more nuanced than that.” Yes, the market is competitive, but you don’t want to rush and make mistakes that you’ll later regret
Making Your Finances an Afterthought
First-time homebuyers make a lot of missteps in this area. For starters, Saud Rai, broker associate and team leader of the Skywalker Group of The Keyes Company in Homestead, FL, says not securing pre-approval is one of the biggest mistakes you can make. “Not having a pre-approval secured means you are not ready to make an offer – even if you find your dream home,” he warns. In fact, Rai says you’ll be wasting your time and effort, and you’ll hinder your ability to compete with other buyers. “Also getting pre-approved will give you a complete picture of what you can qualify for.”
Florence Saade, realtor associate at Brown Harris Stevens in Miami, FL, agrees, adding that some first-time homebuyers don’t even know what price range they can actually afford. “The amount of mortgage the bank approves is the homebuyer’s true budget and the price point they should share with their realtor.” And without that mortgage pre-approval and budget, she says buyers could be sorely disappointed when they fall in love with a home that isn’t in their price range.
Another mistake is not checking your credit score and failing to eliminate any outstanding financial issues, so pay off your other debts, and avoid making other major purchases. “You should also have proof of earnings, tax returns, and any family financial contributions on hand to support your loan approval,” says Julie Jones, VP of ultra-luxury sales, and broker associate at Douglas Elliman Real Estate in Fort Lauderdale, FL. She also recommends applying to more than one bank or credit union and shopping around for mortgage interest rates.
Confusing Pre-qualification and Pre-approval
Sometimes, first-time home buyers think they’re getting pre-approved when they’re actually getting pre-qualified. “Though people may think the terms can be used interchangeably, pre-qualified and pre-approved are two distinctly different aspects of the home finance process,” says Matt Vernon, head of consumer lending at Bank of America.
Pre-qualification is a step that many prospective homebuyers take before pre-approval. “Pre-qualification can help you set realistic expectations when it comes to buying a house because it provides you with an estimate of how much a lender may lend you,” he explains. And while being pre-qualified is no guarantee that you’ll secure a loan, he says it can help the loan process.
It’s important to note that being pre-qualified doesn’t guarantee you’ll get a loan, but it can help the process.
“Having pre-approval for a mortgage means the lender has examined your income, credit, and other expenses to determine the mortgage amount you may qualify for.” And if you’re pre-approved, you’ll receive a pre-approval letter. “This is an offer – but not a commitment – to lend you a specific amount, and the offer is good for 90 days,” Vernon says. The advantage of being pre-approved, compared to being pre-qualified, is that it’s a more serious step, and Vernon says you’ll be more appealing to home sellers.
Getting Info From Family/Friends Instead of Professionals
While you will naturally talk to family members and friends when buying a home for the first time, they may not be the best source of information. “Professionals experienced in the industry are the most valuable assets for first time home buyers,” according to Saade. “I start the process with a sit down to understand what the buyers are looking for in a home, and this is the time to communicate all of their needs.”
In fact, this process should be started sooner, rather than later. Talk to the professionals long before you start shopping for a home. “If buying a home is the goal for a year or two down the road, it costs nothing to talk with a lender to understand that part of the home buying process,” says Lisa Culp Taylor, realtor and team leader at LCT Team-Parks in Franklin, TN. In addition to helping you understand the various loan options, she says they can offer advice on what you need to do to position yourself for success.
Not Understanding All of Your Options
Some mortgage options are better than others, but you’ll never know if you don’t research the various mortgage products. “Ask your mortgage professional about all options available to you — such as FHA loans or even VA loans (if you’re a veteran), or first-time homebuyer programs,” advises Russell. And he says a good mortgage professional will walk you through the various products and explain their features and benefits. “The amount you save from this conversation, or this series of conversations, could mean thousands more dollars in your pocket over the life of the loan.”
Also, there are various first-time homebuyer loans and grant programs available. “Many people overlook these options when shopping for their first home because they don’t know these programs exist or don’t think they qualify,” Vernon says. “In reality, grants to help make the cost of homeownership more affordable are available for first-time homebuyers and even for those who have purchased a home before.”
For example, he points to Bank of America’s program, America’s Home Grant, which can provide up to $7,500 to cover closing costs, or buyers can receive up to 3% of the home’s purchase price (whichever is less) to be used toward a down payment. “In addition to grants from lenders, be sure to research if the city or town you’re looking at offers any homebuying incentives you can take advantage of,” Vernon advises.
In addition, Jones recommends looking for special first-time buyer professional programs – such as those for accountants, physicians, attorney’s, etc.
Failing to Budget for Closing Costs or Surprise Expenses
While first time buyers know to budget for the down payment, they may overlook closing costs. “It’s important to budget for 3% to 5% of the total cost of the home, or the amount you’re borrowing from the lender to purchase the home,” advises Vernon.
Also, according to one survey, homeowners pay nearly $15,000 in hidden costs. “In addition to upfront costs, you should be prepared to face additional costs for repairs and maintenance,” he explains. For example, you may need to repair or replace such home components as plumbing, electrical, heating and cooling – or even your roof.
You’ll also want to avoid any surprises in your monthly payments. “Insurance and taxes will probably change, so do not rely on the current costs,” warns Jones. She recommends aligning yourself with a good insurance agent to avoid last minute surprises.
Settling for a Home That May Not Work
In the rush to find a home, don’t make the mistake of putting an offer on anything that’s available. Despite limited inventory, it’s usually better to wait for the home that has the majority – if not all – of your ‘must-haves,’ and falls within your budget,” says Russell.
Jones agrees, and recommends looking carefully at the floorplan to ensure the home matches your lifestyle. “It may not be your forever home but it should serve your purposes for at least three years.”
However, you’ll also need to balance what you want and what you need. “Don’t make the mistake of thinking of a first home as a life-time home and have a huge list of priorities,” Taylor says. She warns that this will set you up for disappointment.