15 First-Time Homebuyer Mistakes to Avoid
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15 First-time homebuyer mistakes to avoid!!!
It’s not uncommon for first-time homebuyers to make mistakes like house hunting before getting pre-approved, overspending on a property and ignoring their credit. This is to be expected. The truth is, buying a home is more complicated and complex than renting, so many buyers don’t know what to expect.
The good news is that buying your first property prepares you for buying a second or third home. In which case, you’ll know what to do—and what not to do—for a smoother process.
Here’s a look at common mistakes to avoid as a first-time buyer.
1. House hunting before getting pre-approved
There’s no rule that says you have to get pre-approved for a mortgage before shopping for a house, but a pre-approval has its benefits.
This involves applying for a home loan and providing a lender with supporting documentation. The lender reviews your income, credit and other assets to determine whether you qualify for a mortgage, and your qualifying amount.
Getting pre-approved ensures that you only shop for homes within your price range. Plus, sellers are more likely to accept a bid from a pre-approved buyer.
2. Never checking your credit
Always, always, always check your credit report and credit score before getting a mortgage—at least 6 to 12 months before applying.
Getting approved for a home loan requires meeting minimum credit requirements. You typically need a credit score of at least 580 to 620.
Checking your credit report also reveals negative items reported in error. Disputing these items and getting them off your credit report can raise your credit score, helping you qualify for a better mortgage rate. To get a copy of your credit reports, visit AnnualCreditReports.com.
3. Thinking you need a 20% down payment
Some would-be homebuyers put off applying for a mortgage because they think they need a 20% down payment.
This is an “ideal” down payment amount. Yet, most mortgage programs require far less cash. Typically, you only need a 3% to 5% down payment.
4. Forgetting about closing costs
A down payment isn’t the only expense when buying a house. Homebuyers are also responsible for their closing costs. These are lender and third-party fees which include the mortgage origination fee, appraisal fee, title search fee, attorney fees, etc.
Closing costs can range from 2% to 5% of the loan amount. To get approved for a mortgage, you’ll need enough cash in reserves to pay both your closing costs and down payment. Your mortgage lender will request copies of your financial statements (bank accounts, retirement accounts, brokerage accounts) to confirm you have enough cash.
5. Overspending on a house
As a general rule of thumb, you should spend no more than 28% to 30% of your gross monthly income on a mortgage payment.
This is only a guideline, though. Truthfully, it’s always best to spend less.
Just because you’re pre-approved for a certain amount doesn’t mean you can realistically afford this much on a monthly basis. So be honest about your finances. Even if you’re approved for a $250,000 mortgage, comfortably, you might only be able to afford a $215,000 mortgage.
6. Asking for too much (from the seller)
When submitting your offer to purchase a home, you might be tempted to ask for a lot of concessions.
You might lower the asking price, ask the seller to pay a percentage of your closing costs, request updates to the property and you might even ask for a home warranty.
But while sellers expect some negotiating, don’t go overboard. If you get on a seller’s bad side, they’re likely to choose another offer over yours.
7. Draining your savings to buy a house
Buying a home is expensive since you’re responsible for closing costs and a down payment. But it’s important that you never drain your savings to buy a house.
Always keep some money in reserves for unexpected expenses. If you don’t have money in the bank, you might have to rely on a credit card during an emergency.
8. Forgetting about government loans
Conventional mortgage loans are a popular home loan product, but they aren’t necessarily the best choice.
Government home loan products are also an option, and with these loans, you’re typically able to purchase with less money out-of-pocket. If eligible, you can get a VA home loan or a USDA home loan with no money down. FHA home loans also require little money out-of-pocket and have flexible lending guidelines.
9. Not shopping around
Always get rate quotes from at least 3 to 4 different lenders before choosing a mortgage.
This is how you’ll compare mortgage rates and terms to ensure you’re getting the best loan. As a tip, rate shop within a 14 to 30-day window. By doing so, multiple inquiries will count as a single inquiry on your credit report. You can get rate quotes from big banks, credit unions, community banks, mortgage companies, or online lenders.
10. Skipping a home inspection
A home inspection is optional, but highly recommended. This involves an inspector examining the property and checking the roof, foundation, plumbing, electrical, HVAC system and appliances.
This process can uncover hidden problems with the property, which you can then ask the seller to fix before closing. When writing your bid, make it “subject to a satisfactory home inspection.” This is standard in many home offers.
11. Jumping into homeownership too soon
Some people buy a home because they feel it’s the “adult thing” to do. But it’s important that you only purchase a home when you’re absolutely ready to be a homeowner.
Owning is a huge decision since you’re responsible for repairs, maintenance and upgrades. So consider how much responsibility you’re willing to take on at this point in your life. Also consider whether you’re ready to settle in one place. If not, you’re probably better off renting for the time being.
12. Emotional buying
There’s nothing worse than finding the perfect house, and then learning that the seller has multiple offers.
While there’s nothing wrong with fighting for a property, you must leave your emotions at the door, or else you’ll get caught in a bidding war.
To avoid paying more than expected for a house, decide the max you’re willing to spend on a property, and then stick to your guns.
13. Not using gift funds
Many mortgage loan programs allow buyers to use gift funds for their down payment and closing costs. Typically, these funds must come from an immediate family member such as a parent, grandparent or sibling.
Using gift funds can help you buy a home sooner. Just know that lenders will need information about the donor including their name and the amount of their gift. They also need to write a letter stating that funds are indeed “a gift.” You’re usually not allowed to borrow funds to buy a house.
14. Job hopping
Qualifying for a mortgage usually requires 24 months of consecutive employment, preferably with the same company. If not with the same company, you must work in the same field for at least 24 consecutive months.
Job hopping every few months could prevent a home loan approval. A consistent, stable work history builds a lender’s confidence, making it easier for you to get a mortgage.
15. Ruining a pre-approval
Once you’re pre-approved for a mortgage, it’s important that your credit, income and employment status doesn’t change.
A pre-approval doesn’t guarantee closing. It only means that you’re likely to get the loan. Your lender will re-check your credit about three days before closing, and they’ll also contact your employer to verify that you’re still employed with the company. To keep closing on schedule, don’t change jobs or take on new debt until “after” closing.