Don’t be caught saying, “I wish I had known that before.” Ask any homeowner what they regret not knowing before they bought their home and you’ll hear an array of tips. As a prospective home buyer, take some time to learn about the ins and outs of buying a property so that you can avoid making one of these most common first-time home buyer mistakes.
1. Looking At Houses Before Getting Prequalified
Once you decide that you’re going to buy a house, the first thing you want to do is start looking at listings and seeing them in person. This is a big mistake that a lot of first-time home buyers make. If you’re going to buy a home with a mortgage, the first thing you need to do in the home buying process is get prequalified from a mortgage lender. You can get pre-qualified by providing self-reported information such as your income, assets, debts and credit score. Lenders usually do not require a hard inquiry on your credit - that’s saved for preapproval. Prequalification will give you an estimate of how much house you can afford, which is important to know before you begin looking at homes. Some realtors will even require a prequalification letter before showing you a home.
2. Not Checking Credit Reports In Advance
Before you even begin the home buying process, you (and your co-borrower or co-signer if you have one) need to prepare your credit. You should check all 3 of your credit reports several months in advance and review them thoroughly. If you find any inaccurate information, you should file a dispute with each credit bureau that has the error on their report. According to Experian, most disputes are completed within 10-14 business days but credit bureaus have 30 days to complete the dispute process under the Fair Credit Reporting Act. Lenders will evaluate your credit report in detail and an error on your credit report could lead to a higher interest rate or even rejection of your application.
You should also check your credit score about 2 years in advance and make it a priority to improve it before you apply for a mortgage. This will enable you to get a lower interest rate and save you money over the course of the loan. Learn how to improve your credit score.
3. Getting A Rate Quote From Only One Lender
Similar to shopping for other significant purchases, you need to shop around for a mortgage. Different lenders may offer lower interest rates or more favorable terms than the first rate quote you received. Additionally, lenders have different fees included in closing costs, such as loan origination fees and processing fees, which you should compare. By spending some time now, you will save money at closing and over the course of your loan. While comparing rates and fees, try to avoid multiple hard inquiries on your credit as this will lower your credit score slightly.
4. Treating The Property Like A Home Not An Investment
First-time home buyers often romanticize buying their first home. It’s a big life step, but such a large commitment should be taken seriously. Buying a property is an investment and should be treated as such. You should make a list of the features you “need” as well as the features you “want” before you begin looking at listings to ensure the properties you look at are right for you. The fluctuations of the real estate market are out of your control but there are indicators that you can look for in a property that will increase the chances of its value appreciating over time. Consider the quality of the nearby schools, even if you don’t plan to have children, and the crime rates as these will be reflected in property value. To learn other ways to minimize your risk when buying a home, read our article How To Buy A Home That Will Increase In Value.
5. Taking On Credit During The Closing Period
You have to be very careful with your credit from the moment you get preapproved until you close on the home. This can be a few weeks to a couple of months depending on the closing date. Do not open ANY new lines of credit during this period or miss any credit payments as this will lower your credit score or increase your debt-to-income ratio and can cause the lender to increase your interest rate or delay closing. We recommend avoiding using credit cards during this period, but if you need to, such as for automatic bill payments, then pay the balance off immediately.
6. Only Considering A Conventional Mortgage
In the US, over 60% of homebuyers use conventional mortgages when they buy a house or refinance on credit, according to Ellie Mae, which processes over a third of all mortgage applications. As a first-time home buyer, there are more options available to you than you think. There are national, state and city level assistance programs available to first-time home buyers. Moreover, there are other government-insured loan programs such as VA, USDA and FHA loans that you may qualify for. Do your own research and ask your lender about your options as these will differ from person to person.
7. Not Negotiating The Price of The House
Unfortunately, many first-time home buyers miss the chance to negotiate the price of the house. Have your realtor research similar homes recently sold and provide some guidance on fair prices for the property. Negotiating can make a huge difference in the price of the home and can save you thousands. Learn some negotiation tactics and don’t get so attached that you can’t walk away from a property priced too high.
8. Not Saving For A Down Payment
While you can buy a home with a government-insured program that requires a down payment of less than 20%, you will be paying a significant amount of interest and additional fees over the term of the loan. Mortgage insurance is usually required for FHA and USDA loans and it includes an upfront fee and a yearly fee that is factored into your monthly mortgage payments until you have paid off a certain amount of your loan.
For conventional loans, if you put less than 20% down then private mortgage insurance or PMI is required. Depending on the lender, you may be required to make one up front payment or a combination of that and monthly payments, usually until you have 20% equity in the property.
As mortgage insurance can cost you a significant amount, you should consider the cost of it over the term of your loan (or how long you plan to keep the property) vs saving for a 20% down payment. Learn more about private mortgage insurance and how to make a savings plan.
9. Overlooking Closing Costs
Closing costs are third party fees you have to pay to purchase a home, including the home inspection fee, appraisal fee, insurance premium, lenders fees and more. Several of these fees you’ll have to pay before closing day. Many first-time home buyers are shocked to learn that closing costs can be 3-4% of your home’s value. For a $250,000 home, that ranges from $7,500 to $10,000. You’ll need to save for that on top of your down payment.
In close, buying your first home is exciting but there is a lot to learn about the process. Take time to do your research and get prepared - reading this was a great step. Another helpful article is 4 Requirements To Get Approved For A Mortgage.
For more resources, visit our home buying section of our website.