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14 common mistakes by first-time home buyers

Pittsburgh Post-Gazette logo Pittsburgh Post-Gazette 4/19/2019 By Deborah Kearns / (TNS)
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Buying your first home comes with many big decisions. It’s easy to get swept up in the whirlwind of home shopping and make mistakes that could leave you with buyer’s remorse later.

Whether this is your first rodeo as a home buyer or it’s been many years since you last bought a home, knowledge is power. Here are the 14 most common mistakes first-time buyers make — and how to steer clear of them.

1. Shopping before applying for a mortgage

Many first-time buyers make the mistake of viewing homes before ever meeting with a mortgage lender. This puts you behind if a home hits the market that you love, or you look at homes you can’t afford.

In some large markets, housing inventory is tight and competition is fierce. You might be tempted to stretch your budget or lose a property because you aren’t preapproved for a mortgage, says Alfredo Arteaga, a loan officer with Movement Mortgage in Mission Viejo, Calif.

“Before you fall in love with that gorgeous dream house you’ve been eyeing, be sure to get a fully underwritten preapproval,” Mr. Arteaga says.

Being preapproved sends the message that you’re a serious buyer whose credit and finances pass muster to get a loan.

2. Talk to only one lender

This one is a biggie. First-time buyers might get a mortgage from the first (and only) lender or bank they talk to, potentially leaving thousands of dollars on the table. The more you shop around, the better deal you’re likely to get.

“A good mortgage loan officer can look at your situation and diagnose any potential roadblocks ahead to give you a clear understanding of your home-buying options,” Mr. Arteaga says.

Shop around with at least three lenders, as well as a mortgage broker. Compare rates, lender fees and loan terms. Don’t discount customer service and lender responsiveness; both play key roles in making the mortgage approval process run smoothly.

3. Buy more house than you can afford

It’s easy to fall in love with homes that stretch your budget, but overextending yourself can put you at higher risk of losing your home if you fall on tough financial times.

Instead, focus on what monthly payment you can afford rather than fixating on the maximum loan amount you qualify for. Just because you qualify for a $300,000 loan doesn’t mean you can afford the monthly payments that come with it. Factor in other obligations that don’t show on a credit report when determining how much house you can afford.

4. Move too fast

Buying a home can be complex, particularly when you get into the weeds of the mortgage process. Rushing the process can cost you later on, says Nick Bush, a Realtor with TowerHill Realty in Rockville, Md.

“The biggest mistake that I see is to not plan far enough ahead for their purchase,” Mr. Bush says. “This doesn’t allow them to save (for a down payment and closing costs), fix items on their credit report and debunk some of the myths about the process with a Realtor and lender.”

Instead, map out your home-buying timeline at least a year in advance. Keep in mind it can take months — even years — to repair poor credit and save enough for a sizable down payment. Work on boosting your credit score, paying down debt and saving more money to put you in a stronger position to get preapproved.

5. Drain your savings

Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Ill.

“Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” Mr. Conarchy says.

Home buyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That usually translates into substantial savings on monthly mortgage payments, but it’s not worth the risk of living on the edge, Mr. Conarchy says.

Instead, aim to have three to six months of living expenses in an emergency fund. Paying mortgage insurance isn’t ideal, but depleting your emergency or retirement savings to make a large down payment is riskier.

6. Be careless with credit

Lenders pull credit reports at preapproval to make sure things check out and again just before closing. They want to be sure nothing has changed in your financial picture. Any new loans or credit card accounts on your credit report can jeopardize the closing. 

Your goal should be to keep the status quo in your finances from preapproval to closing. Otherwise, you could lower your credit score, run up your debt-to-income ratio and imperil your final loan approval.

Don’t open new credit cards, close existing accounts, take out new loans or make large purchases on existing credit accounts in the months leading up to applying for a mortgage through closing day. Pay down your existing balances to below 30 percent of your available credit limit, and pay your bills on time and in full every month.

7. Fixate on house over neighborhood

Sure, you want a home that checks off the items on your wish list and meets your needs. Being nitpicky about cosmetics, however, can be short-sighted if you wind up in a neighborhood you hate, says Alison Bernstein, president and founder of Suburban Jungle, a real estate strategy firm.

“Selecting the right town is critical to your life and family development,” Ms. Bernstein says. “The goal is to find you and your brood a place where the culture and values of the (area) match yours. You can always trade up or down for a new home, add a third bathroom or renovate a basement.”

Ask your real estate agent to help you track down neighborhood crime stats and school ratings. Measure the drive from the neighborhood to your job to gauge commuting time and proximity to public transportation. Visit the neighborhood at different times to get a sense of traffic, neighbor interactions and the overall vibe.

8. Make decisions based on emotion

Buying a house is a life milestone. It’s a place where you’ll make memories, create a space that’s truly yours and put down roots. It’s easy to get too attached and make emotional decisions, so remember that you’re also making one of the largest investments of your life, says Ralph DiBugnara, president of Home Qualified in New York City.

“With this being a strong sellers market, a lot of first-time buyers are bidding over what they are comfortable with because it is taking them longer than usual to find homes,” Mr. DiBugnara says.

“Have a budget and stick to it,” he suggests. “Don’t become emotionally attached to a home that is not yours.”

9. Assume you need a 20% down payment

The belief that you must put 20% down is a myth. While a 20% down payment helps you avoid paying private mortgage insurance, many buyers can’t or don’t want to put down that much money. In fact, the median down payment on a home is 13%, according to the National Association of Realtors.

Delaying your home purchase to save up 20% could take years, and you could limit cash flow that could be put to better use maximizing your retirement savings, adding to your emergency fund or paying down high-interest debt.

Instead, you can put as little as 3% down for a conventional mortgage (Yes, you’ll pay mortgage insurance). Some government-insured loans require no more than 3.5% down or even zero down. Also check with local or state housing programs to see if you qualify for housing assistance programs designed for first-time buyers.

10. Wait for the ‘unicorn’

Unicorns do not exist in real estate, and finding the perfect property is like finding a needle in a haystack. Looking for perfection can narrow your choices too much, and you might pass over solid contenders in hopes that something better will come along. This type of thinking can sabotage your search, says James D’Astice, a real estate agent with Compass in Chicago.

Instead, keep an open mind and be willing to put in some sweat equity, Mr. DiBugnara says. And some loan programs let you roll the cost of repairs into your mortgage.

11. Overlook FHA, VA and USDA loans

First-time buyers are often cash-strapped. That can make it harder to qualify for a conventional loan and some assume they have no financing options. That’s where government-insured loans come in.

Look into one of the three government-insured loan programs backed by the Federal Housing Administration, U.S. Department of Veterans Affairs and U.S Department of Agriculture. Here’s a brief overview of each:

FHA loans require just 3.5% down with a minimum 580 credit score. FHA loans can fill the gap for borrowers who don’t have top-notch credit or little money saved. The major drawback is mandatory mortgage insurance, paid both annually and upfront at closing.

VA loans are backed by the government for eligible active-duty and veteran military service members and their spouses. These loans don’t require a down payment, but some borrowers pay a funding fee. VA loans are offered through private lenders, and come with a cap on lender fees to keep them affordable.

USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet income limits to qualify. Some USDA loans do not require a down payment for those with low incomes.

12. Hidden costs of homeownership

If you got sticker shock from seeing your new monthly principal and interest payment, wait until you add up the other costs of owning a home. As a new homeowner, you’ll pay property taxes, mortgage insurance, homeowners insurance, hazard insurance, repairs, maintenance, utilities and more.

A survey found that the average homeowner spends $2,000 annually on maintenance services. Not having enough cushion in your monthly budget — or a healthy rainy day fund — can quickly put you in the red if you’re not prepared.

Your agent or lender can help you crunch numbers on taxes, mortgage insurance and utility bills. Shop around for insurance coverage. Finally, aim to set aside at least 1-3% of the home’s purchase price annually for repairs and maintenance expenses.

13. Fail to line up gift money

Many loan programs allow you to use a gift from a family, friend, employer or charity toward your down payment. Failing to sort out who will provide this money and when, though, can throw a wrench into loan approval.

“The time to confirm that the Bank of Mom and Dad is ready, willing and able to provide you with help for your down payment is before you start home shopping,” says Dana Scanlon, a realtor with Keller Williams Capital Properties in Bethesda, Md. “If a buyer ratifies a contract to purchase a home with an understanding that they will be getting gift money, and the gift money fails to materialize, they can lose their earnest money deposit.”

Instead, have a frank discussion with anyone who offers money as a gift toward your down payment. Nail down how much they’re offering and when you’ll receive the money. Make a copy of the check or electronic transfer showing how and when the money changed hands. Lenders will verify this through bank statements and a signed gift letter.

14. Fail to negotiate a home buyer rebate

Most first-time home buyers don’t understand the concept of home buyer rebates, also known as commission rebates. This is a rebate of up to 1% of the sales price, and it comes out of the buyer agent’s commission, says Ben Mizes, founder and CEO of Clever Real Estate based in St. Louis, Mo.

Home buyer rebates are available in most states, but not all. Ten states prohibit them: Alaska, Alabama, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon and Tennessee.

If you don’t live in one of those states, see if your agent is willing to provide this rebate at closing. On a $300,000 home purchase, that can be a $3,000 savings so it’s worth asking.

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