First-time homebuyers have many decisions to make. It’s not uncommon for first-time homebuyers to make a mistake, just from the lack of experience in the housing industry. Just because mistakes can be made doesn’t mean you have to make them, though. There are many ways that you can avoid them, including reading the most common mistakes below.
Shopping for a Home Without Preapproval
Do you like window shopping? Because that’s all that you are doing when you shop for a home without a preapproval. Without a lender’s estimate of how much money they can lend you, it’s nearly impossible to figure out how much home you can afford.
In fact, many realtors and/or sellers won’t allow you to view a home for sale unless you have a preapproval. This helps the seller/realtor weed out the serious buyers and those that are just being nosey about a home for sale.
Besides the fact that you may not gain entrance to a home for sale, though, you need to know what you can afford. Why look at homes that are way out of your price range? Instead, use the lender’s preapproval to help ensure that you stick within your price range.
Forgetting to Look at the Big Picture
Owning a home means more than making a down payment and then covering the mortgage payment. You have to make sure that you can afford everything that owning a home includes, such as:
- Covering the closing costs for the loan (3% to 5% of the loan amount)
- Covering the cost of basic home maintenance (approximately 1% of the home’s value per year)
- Having enough money to cover emergencies, such as a broken water heater
Owning a home means that you are responsible for a variety of expenses. If you aren’t prepared for it, you could experience financial distress, putting you at risk for mortgage default. This could put your homeownership at risk. To avoid this, make sure you know the actual cost of owning the home including the cost of the taxes, insurance, and all other costs that go into owning the particular home you want to purchase.
Emptying Your Savings Account
It might be exciting to put a large down payment on a home, especially one that is more than 20% of a home’s value, but it’s not always wise. Think about the long-term. Will you have money left in savings for the costs we discussed above? Did you put aside money for retirement? Do you have investments in other areas, not just real estate?
If you empty your savings account and you end up with an emergency, where will you turn? The money you invested in your home will be illiquid. Yes, you may be able to get it with a home equity loan or cash-out refinance, but that takes time and you need to get approved for it. It’s best to leave at least a few months’ worth of mortgage payments in your savings account ‘just in case.’
Not Shopping Around for Mortgage
It can be so exciting to hear the words ‘you’re approved,’ from a lender, but that doesn’t mean that you should stop shopping for a loan. You should get at least three quotes from three different lenders. This gives you a different perspective on the types of loans, the closing costs, and the interest rates that are available to you.
If you settle on what the first lender offers, you never know if you are leaving money on the table or paying too much for closing costs. When you have at least three loans to compare, you can get a better feel for the average cost of the loan in the area. Plus, you never know when you will come across a lender with unique qualification requirements that enables you to get a more favorable loan that other lenders may not offer.
Not Freezing Your Financial Life
Once you apply for a mortgage (this includes the preapproval), you want to ‘freeze’ your financial life. In other words, you want to keep everything status quo. The lender gave you an approval based on your credit, income, assets, and debts at this time. If you go and change things, your approval doesn’t mean anything any longer.
Many first-time homebuyers think that once they get the initial approval that the lender won’t look at their qualifying factors anymore. This isn’t the case, though. Typically, lenders will pull your credit again right before the closing and they will also verify your employment/income one last time. If they pull your credit and find that you went on a spending spree or took out a new loan, it changes the parameters of your qualifying factors and it may render you a denial for your loan in the final hour.
Instead, do the following:
- Don’t spend excessive amounts of money on credit
- Don’t open new accounts
- Don’t apply for new credit
- Don’t close any current credit accounts
- Don’t change jobs
- Don’t make any large purchases from your saving/checking account that the lender verified
Making a Decision Without Considering the Neighborhood
Many people get so stuck on the type of home that they want that they forget to check out the neighborhood. This could leave you in a bad situation if you wind up hating the area that the home is located.
When you find a home that you think you like, take the time to explore the area. How close are the stores? How close are the schools? Is public transportation nearby (if that’s something you need). How close are the houses to one another? Do the neighbors seem to get along? Are there a lot of foreclosures in the area?
These are things you’ll want to consider. In fact, we suggest visiting a home during different times of the day and different days of the week. This way you can really see what the neighborhood is like at all times. Who knows, the neighbor next door might be nice and quiet on a Monday afternoon, but throw crazy loud parties on Friday and Saturday night. You wouldn’t want to find that out the hard way!
These first-time homebuyer mistakes are easy to avoid, you just have to take your time. We know it’s exciting to buy your first home, but remember, it’s one of the largest investments you will likely make in your lifetime. You should take it slow and make sure that you are making a wise decision.