Buying a home can be overwhelming for anyone, but first-time home buyers can be more susceptible to making a mistake that could cost thousands of dollars simply because you have never done this before.
When everything is new, nothing feels easy.
Luckily, the right mortgage lender can help you avoid the most common mistakes. So, step one: choose the right mortgage lender! No worries…we have some advice about that and other tips for tackling the home-buying process like a pro below.
Mistake #1: You wait until you have found your dream home before contacting a mortgage lender.
In today’s market, houses move quickly. A mortgage lender can get you pre-qualified and pre-approved for a loan, giving you a better idea of what price range you should be exploring. In addition, pre-approval offers the seller some reassurance that your financing won’t fall through at the last minute, which means you could win or lose a bidding situation with multiple offers based on your pre-approval status.
Mistake #2: You don’t understand your budget.
Be careful not to max out your housing costs based on your pre-approval amount. Our approval process only takes into account your income and your loans. When meeting with new home buyers, I always ask them a lot of questions about their daily life to help establish what they can actually afford. For instance:
- List your major expenses. For most first-time home buyers, that means your rent, any utilities, cable or streaming apps, cell phone bill, possibly school loans, childcare if needed, and taxes.
- Go through your checking account statement and highlight all your additional expenses (we all spend more at Target than we think we do!). Then consider things that you could possibly live without in order to save for a bigger down payment.
- What expenses aren’t currently part of your monthly budget that might change in the next year or so? For instance, are you hoping to grow your family with a baby soon? Will you need daycare? Will you need a new car in the next year or two?
Mistake #3: You underestimate the impact of your credit score (or haven’t built enough credit).
Many first-time home buyers don’t realize how much your credit score can influence your mortgage loan. A lower credit score can mean you have to pay a higher interest rate. A credit score that is too low can keep you from qualifying for a mortgage loan altogether. Your mortgage lender can offer suggestions for raising your credit score over the next six months or so and help you understand the savings a higher score could mean over the life of your mortgage loan.
If the problem is that you haven’t built much credit history to establish a strong credit score, consider using your credit card for all your expenses and then immediately pay it off in full each month. The three most common ways that a person builds credit before owning a home are credit cards, student loans, and car payments. My best piece of advice? Pay your bills on time.
Mistake #4: Waiting until you have 20% down.
Obviously, being able to put a 20% down payment on your home is ideal because it helps you avoid private mortgage insurance (PMI). In this case, the mistake lies in the fact that many people put off buying their first home too long based on this myth. Again, talking to your mortgage lender can be helpful because they can let you know if you qualify for any special loan programs for first-time home buyers. A good goal to shoot for would be at least 10% down payment, but all rules have exceptions, so that conversation with your mortgage lender is especially important in order to understand all your options.
Mistake #5: Using all available funds without leaving yourself a safety net.
Do not clean yourself out of savings. You may be tempted to use every last penny on a down payment, but there will undoubtedly be unexpected costs associated with buying a new home. Leave yourself some wiggle room in case something goes wrong or your circumstances change. If you lost your job, could you pay your mortgage until you find something new? The pie-in-the-sky goal is 6 months of emergency funds, but you can work up to that. Shoot for at least 2-3 months of back-up cash.
Mistake #6: Not considering resale value of your house down the road.
I have a friend whose Dad used to say, “Don’t buy the biggest house on the block.” There is something to be said for that common-sense wisdom. For instance, a smaller home surrounded by beautiful larger homes will sell for more than a spacious home in a run-down area. Statistics suggest that you won’t live in your first home forever. Consider resale factors, such as location, most popular features including number of bedrooms and bathrooms, lot size, and so on. It might be worth your time to save a little longer for something that will hold its value better.
Mistake #7: Waiving the inspection.
Don’t waive the inspection. You need to know if you are getting into something unexpected. Almost always, when an inspector finds something major, the current owners are completely unaware. Something like mold hidden in the attic or an unstable foundation might be just as big of a surprise to them as to you. Do not waive the inspection. That is all.
Mistake #8: You don’t use a realtor.
With the advent of online listing options, some people opt to find a home on their own. We recommend that first-time home buyers work with a realtor. An experienced realtor has so much knowledge and additional contacts to help guide you through the process and help you avoid many of these mistakes. Sometimes, they even see available homes before they go on the market. Realtors are a great resource for learning the ropes the first time around.
Mistake #9: You do not shop around for your mortgage loan.
Nine times out of ten, people go to a mortgage lender that someone they know recommended. That’s great, but every situation is different. This is particularly important if your credit score is lower than you would like. It’s smart to compare apples to apples at 2-3 different lenders. At State Bank of Cross Plains, we service our own loans rather than selling them to an outside company. That means you can just stop into any of our locations to make your mortgage payment or meet with your lender personally to ask questions.
Mistake #10: Rushing into a purchase.
Many first-time home buyers feel a sense of panic when they find a home they love. Panic and rushing lead to mistakes. Know that the right home will come along. Take the time you need to cross all your t’s and dot all your i’s rather than assuming it will all work out.
Above all, build trust with the people who are helping you attain your first house. We find great joy in helping you settle into the place you call home.
Our website has a wealth of insight into the home-buying experience. If you have questions about your options or are simply curious about starting the process, please contact me directly via email or phone (608.490.2237).