5 Mistakes First-Time Homebuyers Make
Buying your first home is an exciting venture! However, the process can be daunting and there are a few common mistakes first-time homebuyers tend to make. In fact, even those who have bought more than one home fall victim to these mistakes from time to time. Here are five mistakes to avoid when you are buying a home.
Only Talking To One Lender. Different lenders offer different rates and programs. Sometimes, a local bank might be your best option as they may be able to tailor the loan to your needs. The loan officer themselves can also make all the difference in the world. I have worked with loan officers who are incredibly proactive and quick to respond and I have also worked with lenders who are difficult to get ahold of. The loan officer will be a key player in your transaction so make sure they are a good fit for you. It is also important to be careful when choosing a lender. The recent rollback of the Dodd-Frank Wall Street Reform and Consumer Protection Act lifted some of the regulations on small and mid-size banks.
Maxing Out The Budget. Getting a pre-approval letter from the lender is a necessary first step for homebuyers looking to purchase using a loan. The pre-approval process doesn’t take long, but it does begin the underwriting process which gives you a much more concrete number to keep in mind as your budget. Sellers will want to see the letter included with your offer as reassurance that your financing is unlikely to fall through. When buyers receive their pre-approval letter with a number the lender feels they qualify for, it often comes as a happy surprise, but just because you have more buying power than you anticipated doesn’t mean you should utilize it. Maxing out your budget is unwise. After all, homeownership often comes with unexpected expenses. You will want to have enough stowed away to make repairs and keep up with routine maintenance. Lenders take your debt and monthly obligations into account when coming to a number, but you will want to be absolutely certain that you are comfortable with the monthly payments.
Assuming 20% Down Is Mandatory. Many buyers don’t put down 20% when they buy a home. In fact, more than 70% of first-time homebuyers and 54% of all homebuyers put down less than 20%. There are even loan programs that allow you to put 0% down. Sometimes this is advisable, other times, it isn’t. Private Mortgage Insurance (PMI) is the reason most often cited for putting down at least 20%. Homeowners who have less than 20% equity in the home are often required to pay for PMI which ranges from .3% to 1.15% of your loan amount annually. Some buyers feel it is worth paying PMI for a time in order to keep some money saved. Again, it is unwise to totally decimate your savings. Keep in mind that lenders are required to stop charging PMI automatically when a homeowner reaches 22% equity, but borrowers can request to have the payments terminated when they reach 20% equity. If you elect to put less than 20% down and pay PMI, it is really important to pay attention to your principal balance each month!
Only Shopping In the Spring. If you have to, you have to, but it is probably in your best interest not to shop in the spring. Why? Buying a home is stressful. Buying your first home is even more so. As a rule, the spring market is bananas. In the whirlwind, buyers occasionally make bad decisions. It is common to get into bidding wars, forgo contingencies, and lose out on multiple homes before finally going under contract. The frustration may lead to rash decisions. Sometimes it all works out. Sometimes you end up overpaying for a home.
Changing The Plan. Many buyers are looking for something specific—a home in a particular county, or a farm with a certain number of acres, or a house with at least 4 bedrooms. As the search wears on, it is common for buyers to become discouraged and for plans to go out the window. Suddenly, the search radius doubles, or the horses can be kept stalled, or the bedroom can be added later. Make a list of needs vs. wants. It’s true that sometimes buyers find they have had unrealistic expectations, but be sure that you don’t stray too far from your core must haves.
Take your time, stay informed, and don’t get disheartened. Buying your first home is a momentous occasion and, as such, may come with the trials and tribulations to match. Doing a bit of research and gaining an understanding of the process will help to ease your nerves. Congratulations on getting ready to buy your first home!