When I started looking into buying a house, I felt extremely overwhelmed. I ended up putting it off until I felt better prepared because I always felt like I was walking into an exam room unprepared. As a first-time home buyer there are so many things you don’t know about and if you go into this process with blinders on you will most certainly regret buying a home. Hindsight is always twenty-twenty, and I found myself in tears at some point. It can be frustrating but with some experience now I can highlight some of the first-time home buyer mistakes that you should avoid.
If you watch all the HGTV shows that have beautiful home renovations and a seemingly seamless home buying process, then you think that it’s a very straight forward process. You see people buying homes in gorgeous neighborhoods, quick renovations that look affordable and you think, “I can do this”. What the shows don’t tell you is the mortgage approval process, the interest rates that you get quoted, the endless search for a ‘perfect’ home, the inspections and the disappointment that you will encounter.
If I haven’t scared you enough yet read this post on the step by step process you should follow to buy a home. Then read on here for the first-time home buyer mistakes that you should avoid.
FIRST TIME HOME BUYER TIPS PER DAVE RAMSEY
Table of Contents
First-Time Home Buyer Mistakes to Avoid
Having a Bad or Low Credit Score
The first thing that will come up when you start the home buying process is your credit score. This number shows creditors how good you are at paying back for things. If you have a low credit score it will impact the interest rate that you get quoted because you are a riskier borrower. The other thing your credit score tells lenders is your debt to income ratio. If you have high credit card debt, student loans, car payments and personal loans you also present higher risk because your income is tied up.
Before starting to look for a home fix your credit score. Work on paying off debt and avoid taking on any more debt. If your credit score is really low lenders can refuse to give you loans outright. For now, I would recommend checking your credit score if you don’t know what it is. Make sure there aren’t errors in your credit report that could ruin your credit which is definitely a first-time home buyer mistake to avoid. To repair your credit score start here.
Not Getting Pre-Approved First
Depending on who you are working with pre-approval letter may not be required. This does not mean that you shouldn’t get pre-approval. Getting pre-approved by a lender first ensures that you know exactly how much you can spend on a home. It would really be disappointing if you started searching for a home that you cannot get qualified for.
Some of the things that impact how much you are pre-approved for include income, debt balance and your credit score. Apply at a local bank or online to find out how much lenders are willing to lend. This will also assist you in knowing how much you can pay out of pocket if you have savings and gifts set aside for your first home.
Confusion About How Much You Can Really Afford
Sometimes we get disillusioned because we think we have a lot of money to spend. I fell for that and it was huge disappointment. Dave Ramsey recommends that your housing costs should only be 25 percent of your total budget. Depending on where you live this can be a very low number and so you must play it by ear. Using a mortgage calculator will tell you exactly what a house will cost you per month. It’s great to buy a house for a bargain but if it is too much of a burden on a monthly basis you will start hating your home.
HOW TO BUDGET FOR YOUR HOUSEHOLD THE DAVE RAMSEY WAY
Using a mortgage calculator is a great idea to mitigate this. Simply enter how much you have been pre-approved for, your down payment and credit score. This will give you a ballpark number of how much you will have to spend every month on your mortgage. The numbers are enlightening and just because you got pre-approved for a given amount doesn’t mean that you should spend the whole amount. In fact the best thing would be to spend only a fraction of what you are pre-approved for.
Paying the Lowest Down Payment
Paying the lowest that you can pay on the down payment will lead to higher payments on your monthly mortgage until you are done paying for PMI. PMI as I learned during the process is insurance that the lender requires to protect themselves in case you miss your mortgage payments. The more you pay towards the house the less you have to pay which makes this insurance an implied tax on you for the benefit of a lower down payment.
While I personally don’t think you should pay so much upfront you should at least pay 10% towards your down payment. This will reduce your monthly payments and save you money in the long run. Start saving up for a down payment and even if you have to delay buying a home for a year or 6 months it will save you money in the long run.
Forgetting About Closing Costs
I didn’t even know what closing costs were until I really got into the weeds of the home buying process. This is a typical first-time home buyer mistake to avoid. I’d heard about them on TV shows where the realtor would negotiate who would pay for some or all of the closing costs but as a new homeowner this may as well be a foreign language.
Closing costs include appraisal fees, inspection fees, legal fees, property taxes, title search fees, loan origination fee, application fees and insurance. These costs are in addition to the down payment and are typically 5% of the home value. As you can see these costs can add up very quickly and having to come up with this money on the fly would be the worst headache that you need when you finally find a home.
You could lose a house if you can’t come up with this money in a competitive market. To avoid disappointment, save extra money for closing costs.
Having A Cosigner
There are usually people who will want to help you especially as a first-time home buyer. The only caveat is it will mislead you on how much house you can actually afford. If a parent or relative agree to cosign your mortgage, chances are you will get approved for a higher loan than if you did it alone.
This translates to having a home that you cannot afford on your income. Simply this means that you will struggle to make your payments. Either you would have to find ways to make more money or you could lose the house. This would be a horrible decision to make months into owning your first home. To avoid this, make sure you save for your new home and that you also do a calculation of how much house you can afford on your income
Not Shopping for the Best Rates
Do not think that you only have to buy a home with your local bank or whoever you bank with. Shop around for the best rates that you can get on the market. Lenders will want to make the most that they can from you so if you don’t shop for options you could end up paying higher rates than necessary especially if you have an excellent credit score.
Always do your due diligence as the extra cost or savings would end up coming from you or to you. Research and see if lenders have promotions going on for different terms of the mortgage. It could cost you thousands and alternatively it could save you thousand which you can use towards the mortgage.
Going it Alone
It is tempting to decide to go through the home buying process without a realtor. This however limits you from the get-go. Without experience in home buying and selling there are tricks in the trade that you will undoubtedly not know about. If the cost of hiring a realtor seems high remember that the seller may be the one responsible for realtor fees. Hire a realtor as this is one of the first-time home buyer mistakes to avoid.
A realtor will have more listings to show you and may even know about homes that aren’t even on the market yet. They will negotiate better for you because they have the experience. Also, they will assist in making the best offer to ensure that you secure the deal on a home that you love.
Using Credit Cards and Loans During the Search Process
This is one of the first-time home buyer mistakes that you should be weary of. It is so easy to overlook, and you may think that just because you got pre-approved it is okay to take on more debt. Don’t go buying a car, using your credit cards or opening home store credit cards before you close on your house.
This means that during the home-buying process or phase avoid incurring more debt. That’s because this will impact your debt to income ratio and overall credit score which will increase the interest rate that the lender will charge you. Also avoid closing up credit card accounts and stay on top of all your payments until you finalize the process.
Not Asking for a Home Inspection
It is extremely important to ask for a home inspection especially when buying an older home or a fix upper. This is because even as house flippers renovate houses they may cut short cuts that will cost you money a few months or years into the home. Have the roof inspected and any repairs that have been made checked by a professional. Ask the inspector to check equipment as their replacement by the seller can be contingent on you buying the house.
Inspections prevent you from buying a house that has major repairs that need to be made especially if you pay a premium for the house. First-time home buyers may want to avoid this expense not realizing a couple hundred dollars could save them thousands down the drain.
Ask About Repair and Renovation Costs
Similarly, if you are intending to repair or renovate the house have a contractor come in and check the work required. They will then give you an estimate of what the expected cost will be. If you can get multiple estimates even better because a contractor may underestimate the expense which will cost you much more later. It would be horrible to have an unfinished house because you run out of money.
To avoid this first-time home buyer mistake, ensure that you get a reputable contractor and have them do a comprehensive estimate of all the costs that could come up.
Factoring in Moving Costs
When you have finally closed on your house guess what you need to do? You will need to move from your current home to your new home. Although moving costs may be quite a small fraction of everything that you will spend on buying a new home it is nice to have that money set aside prior to moving day. Alternatively you can ask friends to help but you may still need to hire a truck and such.
Using up All Your Savings
This was a mistake that I almost made not realizing that if I spent all my hard-earned money on this one thing I wouldn’t have anything left over for emergencies and such. Remember you should always have $1,000 set up as an emergency fund and about 6 months’ worth of your expenses in savings. This because life happens, and you do not want to be stuck with this one asset that’s not easy to liquidate if something comes up.
The best way to avoid this mistake is to ensure that you save for your down payments separate from your regular savings. Also plan for closing and moving expenses prior to buying the house to avoid dipping into your savings. The goal is to avoid being house poor.
Disregarding Costs of Owning A Home
As a renter there are various costs that you can avoid because the owner of the property is responsible for them. If you live in an apartment expenses such snow removal, yard work, maintenance and repairs may be included in your rent expense. This means that you do not have a clue of how much it costs to fix a broken fridge, boiler or such. When you become a homeowner all these expenses fall on you. If the roof or fence needs repair, it is up to you to figure out who will repair it and how much it will cost you.
Prior to buying a home it is important to consider these costs as the size and location of your house will impact these costs. Also as mentioned earlier if some of these repairs can be made by the seller prior to buying the house then you can avoid these expenses when you first move into the home.
Considering the Resale Value
As you shop for homes also check the value of the homes around you. Do not be the most expensive house on the block and do not buy in a neighborhood that no one wants to move to. Look at school locations and crime rates for a single-family home for instance. Also, the size of the home matters; a three bedroom is easier to sell than a two-bedroom house. It doesn’t matter how long you plan to stay because if you need to move at some point the ability to sell the home profitably is important.
Hopefully this list is helpful during the home buying process and you can avoid these first-time home buyer mistakes. Make sure you read the step by step guide and as a rule ensure that you protect yourself and your investment during the process.
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