9 Common Mistakes First-Time Home Buyers Make
- January 28, 2022
- by Angela
Buying a house for the first time can be pretty stressful. It is easy to make certain mistakes. This article will be your guide to the common mistakes you should avoid when buying a house.
Buying a Home When You Have Debt
Many people buy a house when they are already in debt (school loans, car loans, personal loans, credit card debt). Keep in mind that buying a new house implies massive new debts. It is a smart move to pay off or consolidate previous debts before buying a house.
It also makes sense to have an emergency fund beforehand. One of our neighbors had their water main burst a week after moving into their new house. The repair wasn’t cheap. Being cash strapped when you first get into a home is pretty common, but if you are too cash strapped it can mean trouble.
Buying a Home That Has Major Issues
When you become a homeowner, you are responsible for the maintenance of the property. Buying a house that has been neglected or needs a lot of work can be more affordable and offer the chance to build sweat equity.
However some problems may be beyond your skills and well above your expected renovation budget. Things like bad smells, leaks, and mechanical problems are red flags to watch out for. We created a property walkthrough checklist with a list of problems to watch out for.
Not Saving Enough for a Down Payment
To buy a house, you need to pay a down payment, which is not small. The higher the down payment the better loan terms you can get (and the less your monthly payment will be).
A typical down payment is 20-25% of the value of the home. Some lending programs allow an 80/15 which means the primary mortgage is 80%, and a second mortgage is 15%, with you putting down 5%.
If homes in your area are selling for above the asking price, you will need to cover the difference between the appraisal value and the purchase price. That can make the down payment even larger.
The good news is, there are a few first time buyer programs out there that you may be able to take advantage of.
Buying a House You Can’t Afford
Being house poor is a real thing. The banks will allow you to leverage yourself to the hilt, making it hard for you to afford other items in your budget.
When I was growing up some friends of my parents bought a huge house in the suburbs. The husband (who was very controlling) would not let his wife buy fans during a super hot supper because “they didn’t have the money”. So living in a big house can mean scraping by.
It makes sense to evaluate your overall budget with a mortgage included to see how your overall lifestyle (and stress level) will look after you move in.
Allowing the Market to Dictate Your Moves
With interest rates low and competition fierce among buyers it can be easy to get caught up in the fever and end up paying too much for a place you don’t really like.
There are stories out there of couples buying homes 2 states away without ever having set foot in the place. There are also stories of fist fights breaking out at home showings.
The market is crazy right now. It is solidly a sellers market. You have to decide, as one buyer among hundreds, if it is really worth all the effort to get involved with this frenzy for a place you might not be 100% happy with…
Yes, interest rates are low. Yes, COVID has us wanting to upgrade our living situation because of working from home, or simply being at home more. Someday this will no longer be the case so you have to weigh out the pros and cons of making a move now vs waiting.
Not Getting Pre-approved
A pre-approval letter is like a VIP card when it comes to home shopping. When you make an offer, it shows buyers you are not only serious but more importantly have access to the money needed to follow through with the purchase.
To get a pre-approval letter you need to make an appointment with a lender. You fill out a bunch of forms (income, assets, and debts) and they will run your credit, and quote you rates and the maximum purchase price you can afford. It makes sense to shop around for lenders because terms can vary widely. Things to watch out for are the interest rate and total closing costs. The lower the better on both.
Getting the Wrong Kind of Mortgage
Before you take out a mortgage you need to inquire what types of mortgages are available and which mortgage suits you best.
There are two main types of mortgages: fixed-rate and adjustable-rate.
Fixed-rate mortgages allow you to lock in your interest rate. They generally come in 30 or 15 year options. 30 year means a lower payment. 15 year means a lower interest rate. For people who want to get out of debt quickly the 15 year can be attractive. One strategy is to go with the 30 year for the lower minimum payment, but then pay ahead on it so it is done in 15 years or less.
Adjustable interest rate mortgages have APRs that will change over time according to the market, so when rates increase, your payment could increase as well. Adjustable rate mortgages were a huge issue during the 2008 recession. People found themselves with reduced incomes (one spouse out of a job) and higher payments at the same times… it was a bad mix. Adjustable rate mortgages only make sense if you know you will hold the property for a short time, or know that additional funds will be freeing up soon. They can be a real trap for buyers who are unaware their payments are virtually guaranteed to go up, and that can lead to defaulting on the loan and being evicted.
Choosing the Wrong Lender
When a couple buys a house they tend to focus on their relationship with their real estate agent but not so much their lender. But which is much more important?
The real estate agent is like a guide. They all pretty much charge the same fee. Having an agent you like and trust is a good idea. Do be careful if the agent is also the seller’s agent, in which case they would have a conflict of interest and an incentive to close the deal and get both the buyer’s and seller’s commission.
When it comes to the lender, emotions or “who you like” should not be in the equation. The loan is purely a business decision. Mortgage roughly translates to “death pledge” in latin. Hopefully you will pay it off before you die. The point is you will live with the terms of the loan for a lot longer than you will the real estate agent (who is down the road as soon as the deal closes).
A good lender will take the time to explain everything about the down payment, mortgage terms, and other variables that go into buying a home. A good lender can save you money and should be looking out for your interests. However do not assume this as you are just another translation in their sales pipeline. After mortgages are established they are typically sold off to servicing companies.
Cosigning Your Mortgage
When you cosign a mortgage, if you have a bad credit history, the lender will suggest that you take out a cosigner to help you repay the mortgage. A cosigner can be your friend, colleague, family member, or spouse with strong creditworthiness and a steady income.
Experts do not recommend this, because if you are not able to repay the mortgage yourself, the cosigner will have to pay it off in full.
A better solution is not to buy a house if you are not financially capable. Wait until you have enough money to buy the house and cover all the associated costs that come up with moving in, repairs, maintenance, etc.
Buying a home is a big investment. It can be a very personal decision too. It is best to raise enough money needed to buy a home vs painting yourself into a corner with your budget. Research the process in advance so that you are prepared and so that you don't make mistakes when it comes time to buy a house.