Buying your first home is a huge milestone in life – but there are so many options and decisions to make along the way, that it’s easy to get tripped up. After all, buying a home is a massive financial investment, and it’s not something that people do every day.
We’d like to help you avoid as many mistakes as possible – including the ones that can cause tremendous heartaches and cost a lot of money. Below are some of the biggest pitfalls to avoid.
Mistake 1: Not Understanding Your Budget
One of the biggest mistakes first-time homebuyers make is not thoroughly understanding their budget. Before you even start to look at homes, you need to have a clear picture of your financial situation and exactly “how much house” you can really afford.
That’s easier said than done because you’re not just talking about your downpayment, closing costs and mortgage. If you don’t look at the broad picture, you could end up “house-rich” but “cash-poor” and come to feel some serious buyer’s regret.
- Solution: Create a detailed budget that includes not only the mortgage payment but also property taxes, homeowner’s insurance, maintenance costs and potential utility bills. Be realistic both about the expenses and what you can comfortably afford with the lifestyle you want. Remember that what you can afford doesn’t have to be what you spend.
Mistake 2: Skipping the Mortgage Pre-Approval Process
The mortgage you think you can afford each month may not be the mortgage you can actually get because that’s in the hands of your lender. You need to be pre-approved for a loan before you make any kind of bid on a home.
A lot of people don’t understand the difference between pre-qualification and pre-approval – and it’s a big one. Pre-qualification is basically a lender’s best guess about your ability to get a mortgage loan, based on what you tell them about your income and finances.
By comparison, a pre-approval is actually a commitment (subject to conditions) to give you a mortgage up to a certain amount. Pre-approval not only helps you understand your budget but also makes you a more attractive buyer to sellers.
- Solution: Shop around for a mortgage lender and get multiple rate quotes until you find one you trust and go through their pre-approval process. This will give you a clear idea of your price range so that you can keep your house-hunting focused and give yourself an edge against other would-be buyers. Shopping around will also help you get the best interest rate and other terms.
Mistake 3: Not Looking Into Financing Special Programs
Many first-time homebuyers are unaware of special programs and loan options designed to make homeownership more accessible.
These programs include regional and local first-time buyer programs, VA loans for veterans, USDA loans for rural areas and FHA loans. These kinds of loans not only offer things like downpayment assistance (and lower downpayment requirements), but they often have relaxed credit rules, easier financing and lower interest rates – all of which can make your dream more affordable than ever.
- Solution: Talk to the mortgage lenders you interview to see what’s available to you and how they would fit your financial situation. Make sure that you fully explore both the pros and cons of any programs you’re considering, including the long-term implications for your finances.
Mistake 4: Ignoring the Location Because You Love the House
It’s easy to fall in love with a house, especially if it has everything you need and most of what you want – but have you checked the neighborhood out? It’s particularly easy to become emotionally attached to the first property you see, but this can lead to impulsive decisions.
The location of your home is just as important as the property itself. Overlooking factors like commute times, the local amenities, transportation options, crime rates, the overall tenor and character of the neighborhood and the quality of schools in the area can result in dissatisfaction with your new home.
- Solution: Balance your priorities. Consider both the house and the neighborhood, your personality and what’s highest on your priority list – whether that’s a home within walking distance of all kinds of restaurants and shops or a quiet suburban abode where you feel comfortable raising the kids. Rushing into a purchase without exploring other options can leave you with serious buyer’s remorse.
Mistake 5: Putting Every Dollar into the Down Payment
While a substantial down payment is commendable, allocating every dollar you have to it can leave you financially vulnerable for a long time to come. You’ll need to have funds available for moving, redecorating, minor upgrades and unexpected maintenance and repairs.
- Solution: Start planning for moving expenses, minor renovations and unexpected repairs from the very start. Balance your desire for a healthy downpayment against the financial safety net you need for unforeseen bills and decide how much of your cash to keep in reserve for the future.
Mistake 6. Applying for New Credit Before Closing
Taking on new credit shortly before closing on your home, such as applying for a credit card at Home Depot or Lowe’s to buy new appliances, can have disastrous consequences. It can affect your credit score and – quite easily – torpedo your mortgage loan even if you have pre-approval.
- Solution: This one is easy enough – you need to wait until after the closing to apply for new credit. Lenders assess your creditworthiness during the mortgage approval process, and any changes could be fatal to your hopes. If you really think you need to make a financial decision that could affect your credit or debt-to-income ratio before the closing date, talk to your lender before you make any moves.
A mistake made during the home-buying process has the potential to haunt you for years to come. By approaching your homeownership journey with patience, research and some professional guidance, you’ll eventually find the perfect home for your budget and needs. Work with an experienced real estate agent who understands your needs and the local market. Their expertise can help you make informed decisions and secure the best possible deal.