As you prepare to buy your first home, you likely face the process with a mixture of fear and excitement, and for a good reason. Buying a home is one of the largest investments you will make, and you want it to be a sound financial choice. Before you start the process, make sure you are not falling victim to these common first-time home buyer mistakes.
1. Failing to Figure How Much You Can Afford
Before you even begin looking for a home, make sure you know how much you can afford. Getting a mortgage pre-approval or pre-qualification can be a good starting point but do not base your home buying budget on this limit alone. You want to work with an amount that you can comfortably afford based on your monthly budget, not based on what you qualify for on paper.
An experienced local mortgage lender can help you identify this figure, customize it to your comfort zone and offer insight into the approval process. You can also use a mortgage affordability calculator to estimate monthly payments, but make sure to include property taxes, increased utilities, and increased home maintenance costs that come with owning your first home. Most importantly, be realistic. Think about your personal spending habits as you make monthly budgeting estimates.
2. Draining Savings as a First-Time Home Buyer
Draining your savings to buy your first home is not a good idea. You will face many unanticipated expenses as a first-time homeowner that require some money in savings to cover.
For example, when your dishwasher breaks unexpectedly, you will be the one responsible for replacing it. After you move into your home, you will find quite a few furnishings and other items that you will need to buy to make it comfortable. Keep a little buffer of savings to help with these types of homeownership expenses.
3. First-Time Home Buyers CANNOT Ignore Credit Reports
Your credit report will be a deciding factor in how much you can borrow and what your interest rate is, so you should check it before starting the mortgage application process. Sometimes credit reports can contain errors, leading to an inflated interest rate that you do not deserve.
Check your credit and correct errors before starting the mortgage application process.
4. Not Getting Pre-Approved Early
Mortgage lenders will offer pre-approvals and pre-qualifications for potential home buyers. This process gives you an idea of how much you would be allowed to borrow and gives you negotiating power when making an offer. While pre-qualification is not the same as the actual mortgage application, it is an essential first step and valuable negotiating tool for first-time home buyers. In the end, it will save time and help you establish a working relationship with your lender.
5. Talking to Just One Lender
First-time home buyers are often so excited to find a lender willing to lend to them that they forget to shop around for the best deal. Fees and rates for mortgages vary quite a bit from one lender to the next, as do the types of mortgage programs and post-closing servicing offered. Talk to multiple lenders, especially the local community bank, to ensure you are getting the best loan offer.
6. Waiving Contingencies
When making an offer on a home, you have the option to add contingencies, such as making the offer conditional to the results of the home inspection. Waiving contingencies may make your offer more desirable, but doing so puts you at risk.
Suppose you don't have a home inspection contingency and discover a serious problem with the home at some point after your offer is accepted, such as a termite infestation or severe water damage. In that case, you may not have a way out of the contract.
Buying your first home should be an exciting adventure, not a financial pitfall. Take care to avoid these mistakes and move forward confidently as you make your first home purchase. As you join the ranks of first-time home buyers, take caution to make sound financial decisions, so your new home will be all that you dreamed it would be.