First-time homebuyers often make mistakes in purchasing a home, simply as a result of not knowing how the process works. But you can purchase your first home as if you’ve done it before, just by avoiding first-time homebuyer mistakes.
Here are five first-time homebuyer mistakes that are both common and avoidable.
1. Not Being Fully Prepared for the Mortgage Application Process
In the smartphone, touchscreen, drive-up world we live in, it’s easy to assume that virtually every business transaction will be easy and immediate. But that’s not true of everything that you might purchase, and that includes mortgages.
When you complete the mortgage application, you have to document the financial information that you provide. That means having names, addresses, phone numbers and account numbers for your bank accounts, brokerage accounts, employer and major loans.
It also means having copies of bank statements, recent pay stubs, W-2s, and any income tax related information that might be necessary.
But in addition to documents, you also need to be able to show that you have sufficient funds for the down payment and closing costs. If this will require obtaining a gift from a family member, or selling an asset like stocks or personal property, you’ll have to have this information ready in advance.
A mortgage preapproval is only as good as the personal documentation that you provide. In addition, having documentation ready in advance makes the entire mortgage application process go more smoothly.
One of the biggest problems that first-time homebuyers experience is a delay in the application process. But that can be remedied with good advanced preparation.
Find out the documentation that you need from your loan officer, and then have it assembled before your meeting or pre-approval telephone call.
2. Buying More House than You can Comfortably Afford
This can create a problem on three different fronts:
- Making the mortgage approval more difficult,
- Risking loan rejection, or
- Leaving yourself “house poor” after the closing.
But despite these issues, first-time homebuyers often attempt to purchase more house than they can reasonably afford. This is one of the reasons why people have mortgage horror stories. Because the buyer attempts to purchase a more expensive home than he has been prequalified for, the application process becomes complicated.
But the bigger issue is the extra cost that the more expensive home will saddle you with. Those stories of first-time homebuyers being forced to live on a shoestring after the purchase abound. But they’re often self-inflicted. As well, buying too much house will leave little wiggle room if one spouse decides to stay home and raise the children.
It’s usually better to buy a little bit less house than you can afford. That will make life more pleasant after the closing.
3. Leaving the Closing Table Broke
This is similar to buying more house than you can afford. If you only have sufficient cash to cover the down payment closing costs, that can leave you broke after the closing. That’s never a good situation for any homeowner to be in, particularly the first-time homebuyer.
That’s because once you move into the home, there will be unexpected expenses. There may be needed repairs, necessary upgrades, or unanticipated expenses. If you have some money left over after closing, these will be minor problems. But if you have no money whatsoever after the closing, they can turn into an early crisis.
Make sure that you have at least a couple of thousand dollars extra left over after the closing. It’ll cover a multitude of contingencies.
4. Not Knowing the Housing Market
Homeowners typically have at least a rough idea as to what values are in their own neighborhoods, and often surrounding neighborhoods. That comes as a result of being a homeowner. But first-time homebuyers usually have no idea what market values are.
Though you normally will rely on real estate professionals for this information, it’s always a good idea to have at least a rough concept of values in the area you are looking to buy in. This will also mean that you will be less reliant on your real estate agent to find a well-priced home for you.
Online resources, such as Realtor.com, Trulia, and Zillow.com, make finding market values easier than ever. If you’re interested in specific neighborhoods, check out what’s available, and what has closed using these resources.
Knowing values in the area will also help you to choose homes in neighborhoods that are within your price range. This will also help you to avoid over-buying. And it’ll also help to avoid last-minute problems with appraisal values.
5. Passing on the Home Inspection to Save a Few Dollars
In the years that I was in the mortgage business, I saw too many occasions where people passed on an opportunity to have a home inspection done on the new property. This wasn’t just first-time homebuyers, but also repeat buyers. The usual reason was saving money on the cost of the inspection.
While it’s understandable that you would want to minimize how much money you are paying in connection with the purchase of a home, it’s important to realize that the money spent on a home inspection is specifically for the purpose of avoiding bigger expenses after the closing.
Once you purchase a home, any unforeseen repairs are your responsibility. If you can determine potential repairs before the closing, it will be the seller’s responsibility.
A home inspection will cost anywhere between $200 and $500. Consider it money well spent. For a few hundred dollars, you may be saving yourself thousands of dollars later. That’s always a good exchange, especially for first-time homebuyers who may be short on cash after the closing.