9 Common Mistakes First Time Homebuyers Make and How to Avoid Them
07/05/2019 Alena Savchenko
Buying your first home can be a fun and exciting process that awakens feelings of freedom, security, and even creativity. It can also be a source of confusion, worry, and fear when you are confronted with the many decisions to be made.
Since a home is likely one of the largest purchases you will ever make, it’s important to take the time to educate yourself on all stages of the homebuying process, and how to make the best choices possible throughout that journey.
Mistakes to Avoid During the Preparation Phase
"A percentage point or two easily can mean a difference of hundreds of dollars per month in the mortgage payment."
When first-time homebuyers worry about what can go wrong for them, visions of plumbing failures or a leaky roof often come to mind. Making sure that you are prepared to handle difficulties like these is important (more on that later), but planning for the best homebuying experience possible starts long before you own even a single shingle. Many forget to do some essential research in the preparation phase:
Mistake #1: Ignoring Your Credit Score
Daniel Cohen is the managing editor of Bills.com, a site that provides valuable tips, advice and tools to help consumers make smart financial decisions. Cohen has also worked as a mortgage loan officer and debt counselor, and held positions in customer care, sales and marketing. Here is his advice on the first steps that potential homebuyers need to take in order to avoid a very expensive mistake.
One of the most common mistakes first-time buyers make is buying a home with poor credit. Good credit means you can qualify for the lowest rates on a mortgage. A percentage point or two can easily mean hundreds of dollars per month difference in the mortgage payment. So, before applying for a mortgage, check your credit reports.
Understand that credit scores and credit reports are not the same thing; information from credit reports is used to develop credit scores. To make sure your credit scores are accurate, it is important to first make sure the information on your credit reports (from the three main agencies: Equifax, Experian, TransUnion) is accurate. Get them, review them and correct any errors.
Many financial institutions and lenders now provide scores to customers in their monthly statements (or online). These score disclosures from creditors do NOT include the underlying credit report. Also, some companies may offer to show you your credit score, but only in return for signing up for credit monitoring for a monthly or annual fee. Do everything you can to get your credit reports in shape, which will provide higher credit scores and lower mortgage rates.
Another common mistake is not doing your homework. It can pay to shop around. The Federal Housing Administration (FHA) and the Veterans Administration (VA) back some mortgages. These programs have slightly more flexible financial requirements to allow more people to buy a home, especially first-time buyers and those with lower credit scores and down payments. Many types of lenders now exist, including niche lenders working with different types of buyers. If one lender turns you down, check with others.
Want to take the smartest steps toward building your financial strength? Learn more about improving your credit score or how to get a truly free credit report.
Mistake #2: Underestimating the True Cost of Buying a Home
Once you have gotten your credit score to the best place it can be, and found the right lender for you, it’s time to take a hard look at your finances. Do you understand all of the costs involved with buying a home, and are you ready to take them on, plus an unexpected bill or two?
Real estate agent Beverly Burris started her career in Manhattan, where she gained valuable experience in one of the most competitive markets in the country. This, combined with her additional background in interior design and public relations, enables her to recognize a property’s potential and work creatively to meet all of her clients’ needs. A Charleston native, she eventually returned and became an agent at William Means. Here are three potential financial mistakes that she warns first-time homebuyers not to make.
- Not starting to save early enough. Saving up for a down payment can take several years. Many buyers want to put 20% down to avoid paying PMI (Private Mortgage Insurance); [even though you don't need 20% down, doing so may result in lower, more affordable monthly mortgage payments]. It can be very frustrating to be emotionally “ready” to buy a home, but miss out on the one you want because you have not reached your financial savings goal yet.
- Not budgeting. Set funds aside for associated closing costs like inspections, contractor fees, lender and attorney fees, and movers. You will also need to budget for upfront repairs that may need to be made to the home (if seller is unwilling to pay for these in negotiations).
- Emptying your savings. If you are buying a previously owned home, it will almost inevitably need some sort of repair not long after you purchase. From replacing a part in your HVAC or washing machine to fixing a leak, owning a home can get expensive and you need an emergency fund ready to go from the very beginning.
Want to dive deeper? Get a comprehensive understanding of the fees and other costs of purchasing a home.
Mistakes to Avoid When Shopping for Homes
Now that you have your financing (and overall budget) in order, it’s time to start shopping for your first home. This can be a very fun and exciting part of the homebuying process, but also a potential source of stress, confusion, and second guessing.
Before you even step foot into an open house, get yourself armed and ready to stand out as a serious buyer with a pre-approval from your lender. In situations where there are several interested buyers, it’s unlikely the seller will even consider an offer from someone who hasn’t been pre-approved already. Often time is of the essence. If you wait until after finding your dream home, it may end up being too late!
Mistake #3: Not Knowing What You Want in a Home...
Real estate closing attorney Heather James is the co-founder of Cook & James. Heather is a member of the State Bar of Georgia and belongs to the Real Property Section and the Privacy and Technology Section. Here are two significant considerations that she urges first-time buyers to think about before and during the leap into homeownership:
First, do you know the area of town in which you want to live and feel sure that you'll be there for at least five years? If you’re at all on the fence, consider renting nearby first so you feel confident [in] your chosen location. It normally takes five or more years to break even in your home investment, [so you may want to hold off on purchasing] if you think you might want to move anytime soon.
Next, do some soul searching about what type of home you want. How big? Are you starting a family soon and may need more space? Do you have big dogs and need a yard and some land? If you are torn between a farm in the country and a condo in the city, it’s a very good bet you are probably not ready to buy.
Mistake #4: Not Knowing What You Need in a Home
Real Estate Broker Dolly Hertz began her career in New York City representing luxury listings, but she also spent two decades as the owner and creative director of her own advertising and marketing firm before entering the real estate business. Hertz has been quoted in the Wall Street Journal, Forbes, and was featured on an episode of House Hunters in Manhattan. She believes that to be successful, first-time homebuyers need to add equal parts flexibility and diligence to their home shopping process. Here’s why.
One mistake first-time homebuyers make is [to expect] to get all the items on [their] wish list. Make a list of your musts: new kitchen, in-ground pool, three full baths, five bedrooms — whatever matters to you. Then hone it down to your top three most vital ones. Everything else you want can be added, renovated, or fixed [when the time is right].
In addition, avoid picking a [real estate agent] because she’s a relative or your friend’s sister. You want to choose a local expert and get three impeccable references from people in the neighborhood who’ve had a successful transaction with him or her.
It’s always recommended that homebuyers work with a local real estate agent, but this is especially true for first-time buyers. Still on the fence? Read here to see how an agent can help you or connect with the experts at Home Captain today.
Mistakes to Avoid in the Purchase Process
Once you have found the home that you want, and made an offer that was accepted, things really start to get exciting. However, you still need to be careful during the contract and closing processes to ensure that you are able to spot any potential problems well in advance.
Miguel A. Suro is a Miami lawyer and founder of The Rich Miser, where he and his wife Lily share practical tips, life hacks, and reviews on living well for less. He feels that many first-time` homebuyers face issues due to skimping on researching and evaluating their desired property.
Suro gives us the next four mistakes that first-time buyers will want to avoid.
Mistake #5: Skipping the Home Inspection
You’ve found what looks to be the absolute perfect house, in your budget. You’ve been informed that an inspection has already been completed and the assessment will be provided. After completing a thorough walk-through with the agent, everything looks to be in great shape and you even have some of the recent repairs documented. And all the signs indicate that they are truly honest, sincere folks. Must you really still pay for your own inspection? Absolutely. Says Suro:
Not having a professional home inspection done (and therefore not finding out about costly issues), [can end up costing you far more than the inspection fee you think you’d rather avoid]. Unless you’re an expert, a simple visual inspection may not alert you to problems such as an outdated electrical panel, corroded sewer pipes, or failing roof.
Mistake #6: Failing to Obtain Insurance Quotes
You’re buying a house with similar square footage to your parents’ home in the same county. Should you assume your homeowners insurance costs will be in the same ballpark as your parents’ when planning for this new expense? Definitely not. Suro warns of this common misstep in homebuyer planning:
Not getting insurance quotes before committing to buy the house (both general homeowners insurance and flood, if applicable) [is another potentially costly mistake you’ll want to avoid]. You should have a pretty exact idea of how much the insurance will cost before making a final commitment to buy.
Make sure you get a quote for the right coverage for your circumstances, and that your coverage is tailored to the risks associated with your home. Also consider whether you want to cover any particular items you will be keeping in your home, such as jewelry, antique furniture or collectable items.
Mistake #7: Not Researching Property Taxes
Consider again the scenario of buying a home of similar square footage and location as your parents’ house. Will your property taxes then be pretty close to the amount your parents currently pay? Never make any assumptions on your own about property taxes, as they are calculated based on the most recently assessed value. Says Suro:
[Be sure to not] underestimate the cost of property taxes, which can be readjusted upwards due to the purchase price of the home triggering a new assessment.
You can learn more about property taxes in general, as well as calculating estimates of property tax values, on government and county websites as well as other online sources.
Mistake #8: Overconfidence in DIY Skills
Noticed that the home you want to buy could use a new deck or flooring? Be careful not to assume it’s going to be a simple weekend project you can complete on your own. It may take more expertise than you initially anticipated, and you wouldn’t want to discover this after you’ve already begun the project. Warns Suro:
[Don’t] overestimate your capacity to do DIY repairs and renovations. Having to call in a professional [last minute] can be very expensive.
Learn how to recognize the signs that your dream home could potentially become a money pit.
Mistake #9: Only Skimming the Paperwork
David Garside is the executive vice president of title and escrow operations at Proper Title, LLC, a full-service title insurance agency. Proper Title manages hundreds of closings each month, and Garside has seen first-hand how things can go awry at a closing. Here’s his advice on how to avoid time-wasting and potentially expensive delays during your closing process.
First-time buyers can potentially minimize delays associated with the "Know Before You Owe" rule, or "TRID," which requires separate three-day receipt and three-day review periods. The three-day receipt period ensures the borrower and seller receive the loan and closing documents. The three-day review period that follows provides ample time for both parties to review the documents.
Any changes from the final walk-through should be addressed before the day of the closing as they could affect the amount of the loan, which would require new loan and closing forms, and thus new receipt and review periods that would require rescheduling the closing.
When the buyer and seller receive the loan and closing forms, they should immediately begin to review them and notify their realtor or attorney if there are any concerns. Just like the walk-through, waiting to mention it at the closing table could result in the need for new forms — and a new closing date.
Want to know more? See how title companies play three key roles in the homebuying process.
From Peaceful Planning to a Calm Closing
Buying your first home is a learning experience, and most buyers will still make a few mistakes. With careful research and planning, yours can be limited to issues like choosing the wrong color on your initial attempt at painting your kitchen.
If you’re a first-time homebuyer, you probably still have many questions. Check out our Guide for First-Time Homebuyers Guide for a deeper dive into what to expect. If you are ready to start shopping for your first home, be sure to stay ahead of your competition — get pre-approved online or contact a PennyMac Loan Officer today!
The views, information, or opinions expressed in this blog do not necessarily represent those of PennyMac Loan Services, LLC and its employees. The inclusion of links to third party sites is not intended to assign importance to those sites or to the information contained therein, nor is it intended to endorse, recommend, or favor any views expressed, or commercial products or services offered on these third party sites, or the vendors sponsoring the sites.
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