Buying a home is one of the most exciting and rewarding experiences in life. It’s also one of the biggest financial decisions you’ll ever make. It’s important to understand all the ins and outs of this process before you start looking for homes.
That way, if you make mistakes (we all do!), you’ll know how to avoid them in the future.
Here are some common first-time buyer mistakes—and how to avoid them:
1. Not understanding PMI
There are two types of mortgage loans: conventional and government-backed.
Conventional loans require a minimum down payment of 5%. Government-backed loans require a minimum down payment of 3.5%.
If you’re buying your first house, you should have enough money saved up for at least a 5% down payment. But that still isn’t enough to avoid paying private mortgage insurance (PMI). You’ll need to put down 20% of the purchase price to avoid PMI.
On average, PMI costs range between 0.22% to 2.25% of your mortgage. Fortunately, PMI payments end when you own more than 20% of the home.
It’s not a mistake to make a small down payment and pay PMI as long as you know what you’re getting into.
2. Overlooking FHA Loans
What is an FHA loan?
An FHA (Federal Housing Administration) loan is a government-backed mortgage designed for people with lower credit scores who may not meet traditional standards for home ownership. it has some unique features that make it a great option for first-time homebuyers.
FHA loans have lower down payment requirements than conventional mortgages, allowing people with lower credit scores to qualify for home ownership. They also offer flexible underwriting guidelines, which means that FHA-approved lenders can be more lenient about what kinds of income you have or what kind of credit history you have.
To qualify for an FHA loan, you must meet certain income and debt-to-income ratio (D/I ratio) criteria. You also need a minimum credit score of 580 in 2022.
3. Getting the Wrong Mortgage
Choosing the wrong mortgage can be one of the biggest mistakes a first-time home buyer can make. The right mortgage will allow you to buy your dream home and build equity. The wrong mortgage could keep you trapped in an underwater house or put you in debt for years to come.
Before choosing a mortgage, it’s important to know what type of loan best fits your situation. Get a fixed rate rather than a variable rate (which changes according to market forces).
A fixed-rate loan is better because it provides stability. If interest rates go up during your term, your monthly payment won’t be affected.
In contrast, with a variable-rate loan, there’s always uncertainty about what your monthly mortgage payment will be.
4. Failing to Check Your Credit Report
You’ll want to review your credit report before you apply for a mortgage. This can help you spot any errors that need to be fixed, like accounts that aren’t yours or loans that have been paid off, and it’s free at AnnualCreditReport.com or Credit Karma.
If there are any issues with your credit report, contact the agency in question directly and follow their instructions on how to get them fixed. It’s fairly common to see something like an old account that hasn’t been updated in years or an old debt that has since been paid off.
It’s important to ensure this information is reflected accurately on your report so lenders can get a true picture of how reliable you’ve been as a borrower in the past (and present).
The next step in the home-buying process is for your lender to review your credit score, income, assets, and debt-to-income ratio and let you know if there are any issues.
Always get quotes from multiple mortgage lenders in order to ensure you’re getting the lowest interest rate and lender fees. It’s the surest way to get more favorable loan terms.
5. Not getting pre-approved early enough
If you’re like most first-time home buyers, you’ll be able to save months of time and frustration if you get pre-approved early on in the process.
Getting pre-approved means that a lender has reviewed your financial information and determined that you have enough income to qualify for a mortgage loan.
This is different from simply “qualifying” for a mortgage loan; lenders are required by law to review your income, assets, debts, and credit history before approving a loan.
Getting pre-approved gives you several advantages:
- You’ll know exactly how much money you can borrow before looking at homes for Sale
- You’ll know what kind of monthly payment you can afford before seeing any homes listed for sale
- You can focus on finding the right house instead of worrying about how much it will cost or whether or not you’ll get approved
Remember what your goal for buying a home is. Don’t get carried away by the excitement—it’s important to keep things in perspective.
This is most likely your largest financial investment, so it’s tough to determine what you can comfortably afford, but it’s important that the monthly mortgage payments aren’t more than 30% of your monthly gross income.
7. Skimping on the home inspection
One of the biggest mistakes first-time homebuyers make is not insisting on a thorough home inspection. The inspector will check for foundation issues, electrical problems, plumbing concerns, and more.
You should hire an experienced inspector who knows what to look for. Your new house may be in great shape, but it’s still worth paying for an inspection because there could be something wrong that you didn’t notice during the walkthrough.
If you find major problems with the house during the inspection, negotiate to have the seller fix them before closing.
Buying an older house may come with some repairs—but don’t get stuck paying for repairs that aren’t your responsibility!
8. Not starting the house hunt early enough
Not starting the house-hunting process early enough is one of the most common mistakes new homeowners make. When you start looking for a home, you’ll need to research different neighborhoods and the best time to look for a home there. This can take a lot of time, but if you wait until crunch time (which is often when listings are scarce), it could mean that your dream home is gone before you even get started.
If you start looking for homes early on in your hunt, then there’s less of a chance that any particular property will sell by the time you’re ready to put in an offer on it.
The best way to avoid this problem is by doing research early on about which areas of town have low inventory levels or high demand; once those areas are identified, it’ll be easier for you to plan ahead.
9. Only viewing one house per day
As a first-time home buyer, you may be so overwhelmed by the number of things to learn and do that you don’t realize how important it is to view multiple houses daily.
The average house hunter views ten homes or more before making an offer. Looking at one house per day could take weeks or months longer than necessary to find the right property.
It’s better to see several houses daily and decide later than miss an opportunity because you didn’t have enough time to see everything.
10. Not looking at homes outside of your budget (just to see if you could)
It’s important to look at homes that are out of your budget. Yes, it’s recommended to stick to houses within your price range and avoid the disappointment of finding yourself in a bidding war when you don’t get the home you want.
But one of the best ways to figure out what you can afford is by looking at homes that are just a bit too expensive. You’ll see how far over budget they are and know whether or not they’re within reach for you. You can always go back and look at more affordable options later on, but if you don’t give yourself enough room in your budget, there won’t be any room left for negotiation.
Doing some research now will also help reduce buyer’s remorse down the road. Knowing that a house was out of reach helps protect against buyers’ regret later on when they wish they had made an offer on it!
11. Not visiting the neighborhood at different times of day
One of the most common mistakes first-time home buyers make is not visiting the neighborhood at different times of the day.
When you’re house hunting, it’s easy to get caught up in all the details. The pretty yard and Nice kitchen or whatever else appeals to you—and forget how a neighborhood actually functions. A good way to check out how well a place works is by visiting during peak hours (rush hour) and off-peak hours (early morning, mid-afternoon).
You want to see what kind of traffic congestion there is, what kind of noise pollution there might be from nearby businesses or construction sites, and whether there are any signs of vandalism or crime in your neighborhood.
If it’s rush hour, look for signs that locals are irritated or inconvenienced by traffic congestion: honking horns, angry faces, and so on.
If it’s early morning or mid-afternoon on weekdays when there aren’t many people around, pay attention to whether trash cans are overflowing or not.
12. Compromising on features you know you’ll regret
The feature most likely to cause consternation among first-time home buyers is the size of the master bedroom. While it might seem like you’ll be able to compromise on other features, such as kitchen cabinets or countertops and flooring, it can be much more difficult to compromise on a bedroom. Here are some tips for deciding what works best for your needs:
If you want an extra-large master bedroom (or even just one that isn’t tiny), consider looking at homes with additional bedrooms instead of compromising on this feature. It may cost more upfront but save you money over time because you’ll be less likely to add renovations and extensions to the home later on.
If you need a spacious bathroom and/or laundry room, look at houses with only one master suite instead of two smaller bedrooms and two small bathrooms. This will give the house enough space for everything else without making each individual room feel cramped.
13. Being too shy to ask questions
Asking questions is the only way to learn. Don’t be afraid to admit that you have no idea what’s going on, or ask a question that might sound stupid. The people working with you are there for you, so don’t hesitate to ask for help!
If anything, they’ll think of you as someone who cares enough to ensure you’re getting what you want.
14. Buying a fixer-upper that is too much work for what you want to commit to
Fixer-uppers can be a great deal, but they can also be more expensive than buying a move-in ready house. It’s easier to purchase a fixer-upper if you have the time and expertise to do the work yourself. Hiring contractors will cost you extra money that could have been spent on the home purchase of a move-in ready home.
15. Neglecting to factor in hidden costs
A common mistake that first-time homebuyers make is not factoring in all of the costs associated with owning a home. Costs you may have to pay include property taxes, insurance, utilities, maintenance, repairs, and more. Be prepared to pay these expenses when they come due to avoid financial hardship or bankruptcy. You should always have an emergency fund to cover unexpected costs like these.
16. Investing before you’re ready
Investing before you’re ready is one of the biggest mistakes a first-time home buyer can make. Don’t invest in anything until you have enough money to do so, and don’t invest more than you can afford to lose. If at all possible, don’t even dip into your savings or retirement funds—even if it’s just a small amount—until after buying the house.
17. Not working with a real estate agent
Working with a real estate agent can help you find the right house, negotiate the right price and understand the local market. Your agent will access listings that aren’t online or in newspapers, allowing them to find off-market houses.
Real estate agents also know how much similar homes sold for recently and can advise you if your asking price is too high or low given current economic conditions in your area. They have experience working with buyers, sellers, and lenders and can recommend mortgage companies based on your individual needs.
18. Not packing boxes ahead of time
Packing up all your stuff ahead of time will help ensure that nothing gets left behind. It also gives you time to repack and rearrange to get the best fit for each box.
Pack some boxes ahead of time so that when move day comes, you have everything ready. You may even want to buy extra tape or labels in advance, so they’re there when they need them.
19. Paying too much for homeowners insurance
The first thing you should do is get an estimate from a few different companies. This will give you a good idea of what’s out there and help you figure out which company is most likely to offer you the best deal.
Once you’ve narrowed down your options, it’s time to start shopping around for homeowners insurance quotes online. The important thing is that they’re reliable and trustworthy so that if something goes wrong with your policy in the future (like if someone breaks into your house), they’ll take care of everything for you without any hassle!
When buying your first home, there are a few things to consider. If you make mistakes, they can be repaired later. But if you don’t do your research and end up in a bad situation, it’s hard to get out of that situation.
The first thing you should consider is how much house you can afford. You may have heard the old saying that buying anything bigger than a bread box will create problems for you once the mortgage payments kick in; however, this isn’t always true! It all depends on how much money you make and how much debt (including student loans) exists on your credit report today.
Start looking at houses in neighborhoods for families that are outside but near a city center or financial district.
Remember, the first-time home buyer is not a novice. You know what you want in a home and how much you’re willing to spend on it. The first-time home buyer is also smart about his or her finances, so there’s no danger of going into debt over their purchase. But even though these buyers have done their homework, they still sometimes make mistakes because they’re inexperienced with real estate transactions and the process of buying a house.
Ensure you avoid these common pitfalls by educating yourself before starting your search for a new home!
I hope you enjoyed these first-time home buyer mistakes to avoid.