Thinking about buying your first home? Before you can unlock the door to home ownership, you have to take some important first steps. From finding the perfect location to financing your purchase, shopping for your first home has challenges that go beyond curb appeal and interior features.
Some of the important steps to home ownership include:
Here are five common mistakes first-time home buyers should avoid.
Budgeting for only the mortgage payment.
Just because you can afford the mortgage payment doesn't mean you can afford to own a home, says New York lawyer Rafael Castellanos, president of Expert Title Insurance.
First-time buyers "have an idea of what their mortgage payment is going to be, but they don't realize there's much more to it," he says.
Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time buyers tend to overlook when shopping for a place.
"Keep in mind, property taxes and insurance have a tendency of going up every year," Castellanos says. "Even if you can afford it now, ask yourself if you'll be able to afford the increased costs later."
Looking for a home first and a loan later.
Home buying doesn't begin with home searching. It begins with a mortgage prequalification — unless you're lucky to have enough money to pay cash for your first house.
Often, first-time home buyers "are afraid to get prequalified," says Steve Anderson, a broker and owner at Re/Max Benchmark Realty in Las Vegas. They fear the lender may tell them they don't qualify for a mortgage, or they qualify for a loan smaller than expected. "So they pick a price range out of the sky and say, 'Let's go look for a house,'" Anderson says.
That's not how it should be done. Yes, it's more fun to go look at houses than to sit in a lender's office where you have to expose your financial situation. But that's a backward approach, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Ill.
"You get preapproved and then you find a home," he says. "That way, you'll make a financial decision vs. an emotional decision."
Not getting professional help.
New to the home-buying game? You'll need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer.
Venturing into this process alone, without professional help, is not a good idea. While every rule has its exception, generally, first-time home buyers should not try to deal directly with the listing agent, Anderson says.
"If you are getting divorced, are you going to go to your spouse's attorney for help? Of course not," he says. "Same here. If you go to a listing agent, they are only going to show you their listings. You must find a buyer's agent to help you."
If you hire an agent without a referral from friends or family, ask the agent to provide references from previous buyers. The same goes for loan officers or mortgage brokers.
"It's very hard for first-time home buyers because they don't know who they are dealing with," Anderson says.
It's crucial to find a professional who will give you "truly independent advice," Conarchy says. Sometimes that means hiring a lawyer.
Using up savings on the down payment.
Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time home buyers make, Conarchy says.
"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," he says.
Home buyers who put 20 percent or more down don't have to pay for mortgage insurance when getting a conventional mortgage. That's usually translated into substantial savings on the monthly mortgage payment. But it's not worth the risk of living on the edge, Conarchy says.
"I'd take paying for mortgage insurance any day over not having money for rainy days," he says. "Everyone — especially homeowners — needs to have a rainy-day fund."
Getting new loans before the deal is closed.
You have prequalified for a loan. You found the house you wanted. The contract is signed, and the closing is in 30 days. Don't celebrate by financing another big purchase.
Lenders pull credit reports before the closing to make sure the borrower's financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing.
Buyers, especially first-timers, often learn this lesson the hard way.
"They sign the contract, and they want to go buy new furniture for the house or a new car," Anderson says. "I remember one case where, just before closing, the buyer drove to the office and said, 'Look at my brand-new car.' I told them, 'You'd better go back to that dealership.'"