Buying a home of your own may make good long-term financial sense, as it is usually cheaper to own than to rent in the long term. However, buying a place for the first time is not without its challenges and problems.
And if you don’t do your homework or your due diligence before buying your house, you may end up paying too much for the property, or buying a property with all kinds of problems.
In no particular order, here are 10 common first time home buyer mistakes and how to avoid them.
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First Time Home Buyer Mistakes To Avoid
1. Not knowing your credit score before you start the home-buying process.
A big factor in determining whether you’ll be qualified for a mortgage largely depends on your credit score. Obviously, the higher your credit score, the better is your chance to get pre-approved for a mortgage loan.
However, fist time home buyers often make the mistakes of completely ignoring their credit score.
So, before you start looking for a home, it makes sense to review your credit report to know where you stand. If you have a not so stellar credit score, take steps to improve it.
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Your credit report should be the first place to start. Your credit report will list all the “bad stuff” that you’ll need to work on. For example if you have too much credit card debts, try to pay them off.
2. Failure to research the neighborhood.
“One of the important aspects of buying a home is learning all you can about the neighborhood. Those who live there already are a great resource,” says Bill Gassett of Max Real Estate Exposure.
Indeed, the neighborhood might look “ok” to you during the day, but “bad” at night. There might be a bar at the corner where there is a lot of noise at a certain time of the night.
You might find later, after you purchase the house, that the neighborhood is ridden with crimes. This potential for surprise is why you must research.
So, never buy a home without thoroughly understanding the overall vibe of the neighborhood.
3. Not seeking professional advice.
Buying a home is a major financial commitment. You’re taking a significant amount of money in the form of a loan to finance the property. Every month you’ll be required to pay a certain amount of mortgage. Plus, you may have other debts that you’re paying on a monthly basis, like a car loan, student loan, etc…
Therefore, it makes sense to speak with a financial advisor before you start the home buying process. A financial advisor can review your financial situations and help you determine whether buying a home can impact your finances.
Use this financial advisor matching tool to find financial advisors in your area.
4. Not getting pre-approved for a mortgage.
Many people, especially first time home buyers, start looking for homes before they even meet with a mortgage lender. They visit properties, find the right home, and fall in love with it. But they realize later that they will not get the place, either because they can’t afford it or because they don’t have a pre-approval letter.
Because you might be competing with other buyers shopping for the exact same house, it makes sense to speak with a mortgage lender about getting pre-approved for a home loan.
Plus, having a pre-approval letter tells the seller that you’re serious and you are able to finance the property.
>> MORE: Get Pre-approved for a Mortgage.
5. Overlooking foreclosure homes.
Many first time home buyers when they’re buying a place is usually to live in. However, situations may arise (whether it’s divorce or you’re moving to another state) where you have to sell your home. But why not make a profit along the way.
And one of the best ways to maximize your chances to earn a good profit if you do decide to sell your house is to buy the property at foreclosure. Properties in foreclosures are a better value than a conventional purchase. However, that doesn’t mean they’re not risky.
Foreclosed properties are sold ‘as is’ and some may therefore have serious defects. But if you’re willing to face the risks, and have extra cash to go towards repairs, you may earn a good return on your investment.
So because you never know what your situation may be in the future, you should not overlook foreclosure properties.
6. You only get one mortgage rate quote.
Some first time home buyers unfortunately make the mistake of working with only one mortgage lender. This is a big mistake that can cost you a significant amount of money over the life of your loan. In fact, mortgage rates vary from lender to lender.
So, when you shop around for several lenders, you have the opportunity to compare several and different rates. Thus, you get to choose the best rates, which could save you thousands in mortgage interests.
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7. Not taking advantage of FHA loan.
Gone are the days where you’re required to put 20% down payment on a house. Nowadays, you can make a down payment as low as 3.5% of the property purchase price, thanks to the Federal Housing Administration (FHA).
Now, it’s better if you have 20% down payment, as you can pay your loan faster and have more equity in your home. And also by putting 20% down payment, you can avoid paying private mortgage insurance. But the reality is that, not too many first-time home buyers can come up with all that cash.
In this case you should not overlook the FHA loan program. In fact, “FHA loans are pretty desirable for most home buyers, because of the favorable terms they offer, including small down payments, competitive interest rates and lower closing costs than standard mortgages,” says Gassett.
He explains that “you need to have a credit score of 580 or above to get the best terms of the loan, including a down payment as little as 3.5%.” If your credit is lower, he continues, “you will need a 10% down payment.”
8. Not having extra cash for home repairs.
When you’re renting, you’re only paying the monthly rent. That’s it. However, as a home owner, you will be responsible when things need to be fixed, like changing a heater. And if you don’t have extra money saved up, you might find yourself in a hole.
So to avoid this mistake, try to save as much money as possible. This way, you can be prepared when emergencies present themselves.
9. Applying for new credit before closing on the house.
A first time home buyer might get pre-approved for a mortgage loan, and to learn later, just before closing, that they did not get the loan. Or that they found that the mortgage rate and fees they had received in the pre-approval letter are changed.
That usually occurs when those home buyers apply for new credit between the approval and closing period. Indeed, when you apply for new credit, it not only lowers your credit score (because a new inquiry is added), but it also increases your debt.
And mortgage lenders also based their decisions on your debt-to-income ratio. So, before you add on new credit accounts or loan, wait until after closing .
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10. Overlooking state and federal housing programs.
Another first time home buyer mistake is a failure to look into their local government agencies to see if they have any first time home buyer programs for which they might qualify. If you don’t look, you’re just leaving money on the table.
There are several first time home buyer programs designed specifically for first-time buyers. Depending on your state, these programs assist with down payment, repair costs, closing costs, etc… All you need to do is to check your city or state housing programs to see if you qualify.
In summary, being a first time home buyer is quite exciting. But it is an expensive and daunting process. Luckily, if you follow the tips and avoid the mistakes mentioned above, the process will be much smoother.
Working With The Right Financial Advisor.
You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.