Major Money Mistakes to Avoid as a First-Time Home Buyer
As a first-time home buyer, you are pressured to get things right. However, you don’t have much experience to rely on.
While a few mistakes may be inevitable, especially if you are not using a real estate agent, there is no reason to go into this situation blind.
Most apparent money mistakes can be avoided if you know how to spot them immediately. Buying a house is a big deal.
Educating yourself before you even start looking at homes puts you in a far better position to avoid making mistakes.
After being in the real estate business for nearly forty years, I can tell you with certainty that the financial mistakes of first-time home buyers are pretty common!
Without have the guidance of professionals it is easy for potential buyers to do things they shouldn’t.
I have written in the past about general first-time buying mistakes. The focus here will be more to do with costly financial blunders to avoid.
Let’s dig in to avoid putting yourself in the wrong position.
Maxing Out Your Loan
The #1 financial mistake is spending more than your means. One of the best first-time home buyer tips I can give you is not to max out the mortgage you can get from the bank or mortgage company.
The amount the lender will give you will vary depending on many factors. What will not be considered is your cost of living, possible repairs you may need on the home, savings goals, and almost everything else that comes up in daily life.
Mortgage lenders may offer you considerably more money than you should accept. Everyone lives life a little differently. You may have no problem paying back the maximum loan amount.
However, you may also find yourself buried under a mortgage you have no hope of repaying if anything should disrupt your financial situation.
Many first-time buyers only consider the mortgage payment. They neglect other expenses like property taxes, insurance, maintenance, and utilities. It’s crucial to budget for all these costs to avoid financial strain.
Understanding The Costs of Homeownership is Crucial
There are many extra expenses when buying a house. These costs can add up quickly and strain your financial well-being if you are not careful.
Only you can judge what you can and cannot handle. If you need the maximum loan amount to get the home you want, you may need to take all you can.
Just try to keep a level head while making your decision. It is better to live in a more modest home you can reasonably afford than to dread the first of the month because you are never sure you can make the payment.
Speaking of expenses, many buyers are not educated well enough when purchasing a home for the first time. There are several extraneous costs associated with buying a house that buyers sometimes are shocked by.
For this reason, I have compiled a comprehensive list of every home buyer’s cost. Some of these expenses are mandatory, while others are things you may or may not opt for.
Not Considering Your Credit Score
Your first home purchase is often the most significant financial decision you have made up to this point. This means you might not completely grasp the implications of what interest rates can do when applied to substantial amounts of money – namely, your home loan.
Your credit score will affect your lending rate for your home, sometimes in a big way. It can mean thousands of dollars over the life of your loan.
For this reason, you should do everything you can to raise your credit score before purchasing a home for the first time.
Most lenders say a credit score above 720 will get you the best interest rates on your loan. A score of 620 is about the minimum for obtaining a conventional loan for a house. In between those numbers, the rates you get will vary.
If your credit score is lower than 720, it is worth talking to a financial adviser or other expert to find out if there are any ways to promptly increase your score.
I recommend that my clients sign up for Credit Karma. It is a free service that helps you quickly improve your financial standing.
It may be well worth the wait if it takes six months to improve your score. You could save a considerable amount of money overall on your house.
Failing to Get Pre-approved
The process of getting pre-approved for a home loan happens quickly. The bank or lender will give you a substantial amount of money. Lenders may take much time to determine if you are a reasonable risk.
Unfortunately, not all first-time home buyers realize this is part of the buying process. Buyers wind up frustrated when they cannot get a loan to snag the home they want.
Ensure you understand there is a difference between getting pre-approved and pre-qualified for a loan.
A lender issuing a pre-approval letter will make sellers and real estate agents far more confident you will get the mortgage.
Getting a pre-qualification letter is very easy to do because rarely is anything ever verified by the lender. With pre-approval, the lender verifies your income, employment, and credit history.
A pre-qualification letter does nothing more than tell someone you can spend “X” money. The problem is that without verification, it is meaningless.
Sellers are motivated to get rid of their homes as quickly as possible. Once they have an offer, they want to finish the sale soon.
If you are not ready to hand over the money, you should not be surprised if the seller moves on to the next buyer. Poor planning could leave you without the home of your dreams.
When you are ready to buy, find the best lender and start pre-qualifying for the loan.
Once you are pre-qualified, you know you are ready to buy. You’ll be in a position to make an offer you can follow through on.
You also have the added benefit of knowing exactly how much you can spend on a house. Remember that your pre-approval does not last indefinitely. Don’t let it expire before buying a home!
Choosing The Wrong Type of Loan
While the most popular type of home loan is still the 30-year fixed-rate mortgage, this is not the only home loan available to buyers. Other options may work better for you, depending on your situation.
The best way to find the right loan is to talk to your preferred lender and explain your concerns and home-buying goals. For instance, if you plan to relocate with your company in the next five years, you may be better off with a 5/1 ARM mortgage.
In this instance, avoiding the standard 30-year fixed-rate mortgage would make more financial sense if the rate you receive on the adjustable-rate loan is better.
You may be doing well financially and want to build home equity as quickly as possible.
In this case, you could choose a 15-year mortgage instead of a 30-year. The payments will be larger, but you will avoid a good deal of interest due to the halving of your loan term.
Work With a Reputable Mortgage Professional
Advising you on the correct mortgage is beyond the scope of this article – or any article for that matter. Speak candidly to your loan institution and choose what works best for you. Just know that going with the traditional route is not always the best financial bet if you are in certain situations.
Mortgage mistakes are more common when buyers don’t have a pro in their corner. Like any other field, some are awesome at the job, and others are not. Interviewing mortgage professionals is a sound business practice. Going with the first lender you speak with is not a good idea.
Is a Low Down Payment Loan Best?
Many first-time buyers are better off going with a low down payment loan. They can have money in reserve than putting all their savings, which they have worked for years to save.
Popular low or no-down payment loan options include an FHA loan or USDA mortgage if the home is in a rural area.
When making an offer, one wise consideration is to ask the seller for a closing cost credit to have even more money left in reserve.
The money you don’t have to come up with for the closing costs can be used for other essentials when buying a home. Instead of taking the cash out of your pocket, you’ll have a financial security blanket for funds when needed.
Closing costs can add up to 2-5% of the home’s purchase price. Many buyers forget to save for this expense, leading to last-minute financial stress.
Focusing Too Much on The Interest Rate
One of the standard financial decisions that first-time home buyers make when purchasing a home is focusing too much on how to get the best interest rate on a mortgage.
While this is undoubtedly important, the rate will mean little if you can’t afford the home a year later.
Not Looking For Ways to Save Money
Sometimes, you can get so caught up with the emotions that you forget your decision’s long-term consequences.
The perfect example is the buyer who starts their home search and stumbles across a home with granite counters in the kitchen and a whirlpool tub in the master bath.
None of the other homes in the price range have these amenities. These things sometimes become so irresistible to buyers that they overlook more obvious things that should not be swept under the rug.
Maybe there are cheaper homes where you could add these things for far less? There are many ways that first-time home buyers can save money. The key is having a true real estate advocate in your corner, pointing some of these things out.
Buying The Wrong Home
Sometimes, despite a buyer’s best efforts, they will buy the wrong home.
There could be any number of reasons why the house ends up being the wrong choice. One of the more common ones is purchasing a “money pit.”
Many real estate agents are all too familiar with this term. This is the home where a constant influx of money is needed to keep the place safe and a viable means of shelter.
Of course, nobody ever sets out to purchase a money pit.
There are times despite your best intentions, it just happens. To minimize the chances of this occurring, a buyer should always have a home inspection checklist. Vigilant buyers will be on the lookout for some of the most common home issues.
A good home inspector will flag these kinds of problems.
Remember, you can’t put lipstick on a pig. The kitchen may have new stainless steel appliances and granite counters; you will care less when your roof leaks or your heating system fails!
Buying The Wrong Location
Ask any qualified real estate agent, and they will tell you that a home location plays a huge role in a home’s value and saleability.
This is another common area where first-time home buyers make financial mistakes they regret.
I can’t even count how many times over the years someone has been looking to sell their home because they can’t stand the area in which they are living. You would not believe how often this happens with people who have not occupied a house for long!
One of the more common scenarios is with first-time home buyers who have purchased a home that they regret buying. The theme I often hear from these folks is not considering their desire to have kids.
Many young couples don’t consider the little ones that could eventually enter their life. Those selling often do so because the street is too busy or the school system isn’t desirable.
When you are young and buying a first home, many do not realize how much schools can affect home values. The same can be said about busy streets when it comes time to sell. It is usually much harder because your buyer pool shrinks tremendously.
Being emotionally attached to a home can lead to overbidding or buying in the wrong place. It’s essential to stay objective and stick to your budget.
Overpaying For a House
Over the last several years, overpaying for a home has become more common. With bidding wars commonplace, some buyers have been forced to spend more than they should.
Sometimes, some buyers also place too much stock in online value estimators such as Redfin and Zillow. These tools are notoriously inaccurate. Unfortunately, many buyers do not realize this and base their decisions on over- or under-inflated values.
Conclusion
There are many financial mistakes to avoid when purchasing your first property. Hopefully, you have found the advice enlightening and won’t make some of the decisions others have made before you.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on the financial mistakes of first-time home buyers. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
Nice work on this article for first time home buyers, Bill!
It’s great to learn from the experience of other first time home buyers to keep from making those same financial mistakes.
Thanks for posting!
Ryan
Great information as always, Bill! Under the topic of “Buying the Wrong Home,” in addition to a home inspection, buyers can get a free Property History Report from Housefax. These reports include building permits, mortgage history, fire, flood, catastrophic history and other property details that can help them get peace of mind about the property or bring potential issues to light. Housefax also offers Insurance Claims Reports that list all claims associated with the property in the past five years.