About to Close on a House? Avoid These 9 First-Time Homebuyer Mistakes
Buying a home for the first time can be intimidating — there’s a ton of steps, mysterious terminology and an ever-changing market. It’s common to make a few mistakes, but some careful research and a good real estate agent can help. We highlighted nine common mistakes to avoid and spoke with experts about the best course of action.
1. Not shopping around for your agent
Scout out your options when choosing a real estate agent and don’t go with the first realtor you meet. You’ll be spending a lot of time with your realtor and it’s important you’re compatible and that you trust them. A Century 21 survey found that 34% of recent homebuyers weren’t likely to use their real estate agent again.
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Ask around with family and friends for referrals for realtors they’ve worked with. A personal recommendation can speak more accurately to a realtor’s quality than an internet search. You’ll want to know whether your prospective realtor is responsive, proactive in finding listings, and can provide a low-pressure and personalized experience.
2. Clogging down your credit score
Before you begin the home-buying process, clear your credit score. Make sure you haven’t had a credit check lately and don’t apply for new credit cards before you buy a home. When getting quotes for a mortgage loan, make sure you apply with each lender within the same two-week time-frame to avoid any credit score impact.
Rick Gehrke, a real estate agent with RE/MAX Executives, advised us to wait until the sale is final, “Once homebuyers finalize a loan and get the keys to their houses, they often make the mistake of getting a new credit card and proceeding to make purchases on it. Don’t buy anything expensive before the mortgage closes. A lender’s mortgage decision is based on the buyer’s credit scores and your debt-to-income ratios. Applying for more credit can contribute to a reduction in credit score, which is a red flag to mortgage lenders.”
3. Shopping for a house before a mortgage
It’s wise to know exactly how much you can qualify for on a mortgage before you start looking for a home. It’d be pretty disappointing to fall in love with a house and discover you can’t finance it. By getting pre-approved, you’ll be a more competitive buyer because you appear more serious about purchasing.
Gehrke told us that some realtors won’t show homes without this understanding of your financial situation, “A lot of potential buyers will go house hunting before finding out how much they can borrow. This leads to disappointment when the buyer discovers they were looking in the wrong price range or offer an incorrect price.”
4. Not shopping around for that mortgage rate
You’ll want to get quotes from multiple mortgage lenders to find the best rate and terms. While your credit score and financial portfolio will influence your rate, each lender factors those things differently. You can save more in the long run if you take the time to find the best rate.
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Gehrke mentioned that rates aren’t the only factor that will vary, “Mortgage interest rates vary by lender, and so do fees such as closing costs and discount points. I highly recommend applying with multiple mortgage lenders. If you get lenders competing with each other, they can find ways to cut fees and lower interest rates.”
5. Committing too large of a down payment
The popular wisdom has often been to down pay 20% of your home’s cost, but it’s an old adage. The average first-time home buyer, according to the National Association of Realtors, pays just 6% down.
While 20% would certainly be ideal for lowering your monthly payment and interest long-term, you don’t want to deplete your savings for a down payment. A mortgage is a healthy form of debt, so don’t be afraid of a long term agreement. Buying a house may involve many other expenses and fees that you’ll need some savings for. And you wouldn’t want to be without an emergency fund, especially in 2020.
Buying a home costs way more than just the price tag. When deciding on your budget, you should consider all the various expenses like closing costs (about 3% of the value of your home), property taxes, home insurance, any repairs or reconstruction, furnishings and appliances, and water cost and electricity in that area.
“Homebuyers may underestimate how much it costs to maintain the home and yard as well as all the utilities, creating even more stress in the monthly budget. Not to mention, it could limit reaching other goals like traveling more or investing. Aim for your mortgage payment to be at around 25% of your take-home pay,” advises Andrea Woroch, a nationally-recognized money-saving expert.
7. Assuming your home will appreciate
Many people justify a home purchase by assuming it will appreciate and be a long-term investment. Ty Stewart, the CEO & President of Simple Life Insure, told us that it’s not guaranteed, “Folks who live in their home for only a few years will earn just a portion of their home’s equity. Likewise, the real estate market in your area may not have appreciated much since you originally bought the house, and especially if you haven’t made improvements. It’s just not as cut-and-dry a profit as it used to be.”
If a home does appreciate, it’s often because of inflation, home improvements and perhaps an increase in the neighborhood value. Depending on the house, those factors may not add up to a significant pay out when you sell.
8. Skipping the home inspection
There are so many stressful steps to buying a home, it can be tempting to skip the home inspection. But it can be critical to have an expert assess a home you’re unfamiliar with before purchasing it. An inspection can unearth any hidden flaw or repair needs that you may not have noticed. It also documents them in a way that gives you power for negotiations and can save you money.
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“A quality home inspection might reveal critical information about the condition of a home and its systems, from electrical problems to hidden mold to a leaky roof. Your inspection report can also serve as a useful negotiating tool: You could use it to ask for repairs or to work out a better price from the seller,” says Lauren Anastasio, a Certified Financial Planner with SoFi.
9. Waiting for the perfect home
Chances are, your perfect home only exists if you build it yourself. For your first home, it’s best to break out your ideal into a list of must-haves, preferences and deal breakers. Determine which features are priorities, like location or size and then rank accordingly. You can always renovate or make additions if the homes in your market don’t come with the perfect kitchen or a home office with a built-in desk. If you wait too long to find the perfect home, you may miss out on a nearly-perfect house and some great interest rates.
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