Purchasing a home involves significant decisions, and the process can be as nerve-wracking as it is thrilling. It's simple to become swept up in the excitement of house hunting and commit mistakes that may lead to buyer's regret later on.
Whether you are a first-time homebuyer or it has been a while since your last purchase, having the right information is essential. Aside from being aware of what mistakes to avoid, it's crucial to gather tips from professionals who can guide you on what to anticipate and which questions to ask.
Below are 13 mistakes that homebuyers often make and tips to prevent them:
1.Beginning house hunting before consulting a lender
It's common for homebuyers to view homes before consulting with a mortgage lender, but this can be a mistake. In competitive markets with high demand and low inventory, you could miss out on a property if you're not preapproved for a mortgage. Additionally, you might end up viewing homes that are outside of your budget.
To avoid these issues, it's recommended that you obtain a fully underwritten pre-approval before looking at homes. This demonstrates to sellers that you are a serious buyer who has been vetted by a lender and is ready to make an offer.
2. Only considering one lender
Many homebuyers make the mistake of only talking to one lender or bank, potentially missing out on thousands of dollars in savings. By shopping around and comparing rates, fees, and loan terms from at least three lenders and a mortgage broker, you can ensure that you're getting the best deal and the lowest rates possible.
A good mortgage loan officer can also identify any potential roadblocks and provide you with a clear understanding of your home-buying options. Don't overlook the importance of customer service and lender responsiveness, as they can play a key role in making the mortgage approval process run smoothly.
3. Purchasing a home that is beyond your financial means
Falling in love with a home that stretches your budget is a common mistake, but overextending yourself can be risky. Buying a home that exceeds your budget could put you at a higher risk of losing your home if you face financial difficulties, and it can limit your ability to pay for other bills and expenses.
Instead of fixating on the maximum loan amount you qualify for, focus on the monthly payment that you can comfortably afford. Keep in mind that just because you can qualify for a large loan doesn't mean that you can afford the monthly payments that come with it. Consider your other obligations and expenses when determining how much house you can truly afford.
4. Moving too quickly during the buying process
The home-buying process can be complicated, especially when it comes to mortgages. Moving too quickly can have negative consequences.
Impact: If you rush the process, you may not have enough money saved for a down payment and closing costs, may neglect to address issues on your credit report, or may make hasty decisions.
Solution: Plan out your home-buying timeline well in advance, giving yourself at least a year. Keep in mind that repairing poor credit and saving for a significant down payment can take months or even years. Focus on improving your credit score, paying off debts, and saving more money to increase your chances of getting pre-approved for a mortgage.
5. Depleting your savings
One of the most common mistakes made by first-time homebuyers is spending all or most of their savings on the down payment and closing costs. Some buyers may opt to scrape together every penny they have to make a 20 percent down payment and avoid paying for mortgage insurance, but this is not always the best decision. In doing so, they may end up with no savings left at all.
How this affects you: While it's true that putting down 20 percent or more can save you money on monthly mortgage payments by eliminating the need for mortgage insurance, it can also leave you financially vulnerable in case of emergencies.
What to do instead: Experts recommend having at least three to six months' worth of living expenses in an emergency fund before making a down payment. It may not be ideal to pay for mortgage insurance, but using up your emergency or retirement savings to make a large down payment could be even riskier in the long run.
6. Being irresponsible with credit
During the pre-approval process, lenders review your credit report to ensure that everything is in order. They will also pull another credit report just before closing to confirm that your financial situation hasn't changed.
How this affects you: If there are any new loans or credit accounts on your credit report, it could put the closing and final loan approval at risk. This is a common lesson learned the hard way by first-time homebuyers.
What to do instead: Keep your finances stable from pre-approval to closing. Avoid opening new credit accounts, closing existing ones, taking out new loans, or making significant purchases on your 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 make sure to pay your bills on time and in full every month.
7. Prioritizing the house itself over the surrounding neighborhood
While finding a home that meets your needs and desires is important, it's crucial not to overlook the neighborhood it's located in. Focusing too much on the house itself can lead to regret if you end up in a neighborhood that doesn't suit you.
“Choosing the right community is essential for your personal and family development. Your goal should be to find a place where the values and culture match your own. You can always upgrade or downgrade your home, add a bathroom or renovate a basement.”
How this affects you: You may end up loving your home, but hating the neighborhood it's located in.
What to do instead: Ask your real estate agent to provide you with neighborhood crime statistics and school ratings. Measure the distance from the neighborhood to your workplace to gauge commuting time and proximity to public transportation. Visit the neighborhood at different times of the day to get a sense of traffic, neighbor interactions, and the overall atmosphere to determine if it's an area that appeals to you.
8. Allowing emotions to dictate your decisions
Buying a home is a significant milestone that involves making a large financial investment. It's easy to get emotionally attached to a house and make impulsive decisions, especially in a strong seller's market where buyers feel pressured to bid above their comfort level.
How this affects you: Emotional decisions can result in overpaying for a home and stretching your budget too thin.
What to do instead: Set a realistic budget and stick to it. Avoid becoming too attached to a property before it's officially yours. Make decisions based on facts and figures rather than emotions.
9. Assuming you need a 20 percent down payment
The belief that a 20 percent down payment is necessary is a misconception. Although a 20 percent down payment can help you avoid paying private mortgage insurance, many buyers today can't or don't want to put down that much money. In fact, the National Association of Realtors reports that the median down payment on a home is 13 percent.
How this affects you: Holding off on buying a home to save up 20 percent could take years, and you could miss out on opportunities to maximize your retirement savings, build up your emergency fund, or pay down high-interest debt.
What to do instead: Explore other mortgage options. You can put as little as 3 percent down for a conventional mortgage, though you'll have to pay mortgage insurance. Some government-insured loans require as little as 3.5 percent down or even zero down, in some cases. Additionally, look into local or state housing programs that offer assistance for first-time buyers.
10. Waiting for the "perfect" home that may not exist
Avoid waiting for the perfect property, as it is a rare find. Focusing too much on perfection can limit your choices and make you overlook great options. Additionally, this mindset may cause you to overpay for a property or take longer to find one.
Instead, keep an open mind about what is available on the market and be willing to put in some work to improve a property. Some loan programs allow you to include repair costs in your mortgage, which can help make a less-than-perfect property more appealing.
11. Overlooking FHA, VA and USDA loans
If you're a first-time homebuyer with limited savings or poor credit, you may struggle to qualify for a conventional loan. Overlooking government-insured loan programs like FHA, VA, and USDA loans could lead you to believe that you have no financing options and delay your home search.
How this affects you: Delaying your home search could cause you to miss out on potential properties or to pay more for a home as prices continue to rise.
What to do instead: Explore the FHA, VA, and USDA loan programs to determine if you are eligible. FHA loans require a minimum credit score of 580 and just 3.5 percent down payment, while VA loans offer no down payment for eligible service members and their spouses. USDA loans are designed for low- to moderate-income borrowers and may not require a down payment. Researching these options can help you find a loan that suits your needs and allows you to move forward with your home search.
12. Underestimating the Additional Costs of Homeownership
When you become a homeowner, it's not just about paying for your monthly mortgage. There are numerous other expenses you need to take into account such as property taxes, mortgage insurance, homeowners insurance, hazard insurance, repairs, maintenance, and utilities. If you fail to consider these costs, you may end up with a monthly budget that's stretched too thin.
How this affects you: A Bankrate.com study shows that homeowners pay an average of $2,000 per year on maintenance services. If you don't have enough savings, you could end up in a financial bind.
What to do instead: Work with your lender or agent to calculate taxes, insurance, and utility bills. Obtain quotes from different insurance providers to compare prices. Aim to set aside at least 1 percent to 3 percent of the home's purchase price annually for maintenance and repair costs.
13. Failing to arrange gift funds
Gift funds from family, friends, employers or charities can be used towards a down payment for many loan programs. However, not planning who will provide this money and when it will be given can complicate the loan approval process.
How this affects you: If a buyer enters into a contract to purchase a home with an expectation of receiving gift money, and the gift money fails to materialize, they risk losing their earnest money deposit. Therefore, it's important to confirm that the gift giver is ready and able to provide you with the gift before you start shopping for a home.
What to do instead: Have a clear and honest discussion with anyone offering gift money about the amount they are willing to give and when you can expect to receive the funds. Keep documentation of the transaction, such as a copy of the check or electronic transfer, to prove the exchange of funds between the gift giver and you. Lenders will verify this through bank statements and a signed gift letter.
Whether you are a first-time homebuyer or it has been a while since your last purchase, having the right information is essential. Aside from being aware of what mistakes to avoid, it's crucial to gather tips from professionals who can guide you on what to anticipate and which questions to ask.
Below are 13 mistakes that homebuyers often make and tips to prevent them:
- Beginning house hunting before consulting a lender
- Only considering one lender
- Purchasing a home that is beyond your financial means
- Moving too quickly during the buying process
- Depleting your savings
- Being careless with your credit score
- Prioritizing the house itself over the surrounding neighborhood
- Allowing emotions to dictate your decisions
- Assuming that a 20% down payment is required
- Waiting for the "perfect" home that may not exist
- Overlooking FHA, VA, and USDA loans
- Underestimating the hidden expenses of homeownership
- Failing to arrange for gift money if it's an option.
1.Beginning house hunting before consulting a lender
It's common for homebuyers to view homes before consulting with a mortgage lender, but this can be a mistake. In competitive markets with high demand and low inventory, you could miss out on a property if you're not preapproved for a mortgage. Additionally, you might end up viewing homes that are outside of your budget.
To avoid these issues, it's recommended that you obtain a fully underwritten pre-approval before looking at homes. This demonstrates to sellers that you are a serious buyer who has been vetted by a lender and is ready to make an offer.
2. Only considering one lender
Many homebuyers make the mistake of only talking to one lender or bank, potentially missing out on thousands of dollars in savings. By shopping around and comparing rates, fees, and loan terms from at least three lenders and a mortgage broker, you can ensure that you're getting the best deal and the lowest rates possible.
A good mortgage loan officer can also identify any potential roadblocks and provide you with a clear understanding of your home-buying options. Don't overlook the importance of customer service and lender responsiveness, as they can play a key role in making the mortgage approval process run smoothly.
3. Purchasing a home that is beyond your financial means
Falling in love with a home that stretches your budget is a common mistake, but overextending yourself can be risky. Buying a home that exceeds your budget could put you at a higher risk of losing your home if you face financial difficulties, and it can limit your ability to pay for other bills and expenses.
Instead of fixating on the maximum loan amount you qualify for, focus on the monthly payment that you can comfortably afford. Keep in mind that just because you can qualify for a large loan doesn't mean that you can afford the monthly payments that come with it. Consider your other obligations and expenses when determining how much house you can truly afford.
4. Moving too quickly during the buying process
The home-buying process can be complicated, especially when it comes to mortgages. Moving too quickly can have negative consequences.
Impact: If you rush the process, you may not have enough money saved for a down payment and closing costs, may neglect to address issues on your credit report, or may make hasty decisions.
Solution: Plan out your home-buying timeline well in advance, giving yourself at least a year. Keep in mind that repairing poor credit and saving for a significant down payment can take months or even years. Focus on improving your credit score, paying off debts, and saving more money to increase your chances of getting pre-approved for a mortgage.
5. Depleting your savings
One of the most common mistakes made by first-time homebuyers is spending all or most of their savings on the down payment and closing costs. Some buyers may opt to scrape together every penny they have to make a 20 percent down payment and avoid paying for mortgage insurance, but this is not always the best decision. In doing so, they may end up with no savings left at all.
How this affects you: While it's true that putting down 20 percent or more can save you money on monthly mortgage payments by eliminating the need for mortgage insurance, it can also leave you financially vulnerable in case of emergencies.
What to do instead: Experts recommend having at least three to six months' worth of living expenses in an emergency fund before making a down payment. It may not be ideal to pay for mortgage insurance, but using up your emergency or retirement savings to make a large down payment could be even riskier in the long run.
6. Being irresponsible with credit
During the pre-approval process, lenders review your credit report to ensure that everything is in order. They will also pull another credit report just before closing to confirm that your financial situation hasn't changed.
How this affects you: If there are any new loans or credit accounts on your credit report, it could put the closing and final loan approval at risk. This is a common lesson learned the hard way by first-time homebuyers.
What to do instead: Keep your finances stable from pre-approval to closing. Avoid opening new credit accounts, closing existing ones, taking out new loans, or making significant purchases on your 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 make sure to pay your bills on time and in full every month.
7. Prioritizing the house itself over the surrounding neighborhood
While finding a home that meets your needs and desires is important, it's crucial not to overlook the neighborhood it's located in. Focusing too much on the house itself can lead to regret if you end up in a neighborhood that doesn't suit you.
“Choosing the right community is essential for your personal and family development. Your goal should be to find a place where the values and culture match your own. You can always upgrade or downgrade your home, add a bathroom or renovate a basement.”
How this affects you: You may end up loving your home, but hating the neighborhood it's located in.
What to do instead: Ask your real estate agent to provide you with neighborhood crime statistics and school ratings. Measure the distance from the neighborhood to your workplace to gauge commuting time and proximity to public transportation. Visit the neighborhood at different times of the day to get a sense of traffic, neighbor interactions, and the overall atmosphere to determine if it's an area that appeals to you.
8. Allowing emotions to dictate your decisions
Buying a home is a significant milestone that involves making a large financial investment. It's easy to get emotionally attached to a house and make impulsive decisions, especially in a strong seller's market where buyers feel pressured to bid above their comfort level.
How this affects you: Emotional decisions can result in overpaying for a home and stretching your budget too thin.
What to do instead: Set a realistic budget and stick to it. Avoid becoming too attached to a property before it's officially yours. Make decisions based on facts and figures rather than emotions.
9. Assuming you need a 20 percent down payment
The belief that a 20 percent down payment is necessary is a misconception. Although a 20 percent down payment can help you avoid paying private mortgage insurance, many buyers today can't or don't want to put down that much money. In fact, the National Association of Realtors reports that the median down payment on a home is 13 percent.
How this affects you: Holding off on buying a home to save up 20 percent could take years, and you could miss out on opportunities to maximize your retirement savings, build up your emergency fund, or pay down high-interest debt.
What to do instead: Explore other mortgage options. You can put as little as 3 percent down for a conventional mortgage, though you'll have to pay mortgage insurance. Some government-insured loans require as little as 3.5 percent down or even zero down, in some cases. Additionally, look into local or state housing programs that offer assistance for first-time buyers.
10. Waiting for the "perfect" home that may not exist
Avoid waiting for the perfect property, as it is a rare find. Focusing too much on perfection can limit your choices and make you overlook great options. Additionally, this mindset may cause you to overpay for a property or take longer to find one.
Instead, keep an open mind about what is available on the market and be willing to put in some work to improve a property. Some loan programs allow you to include repair costs in your mortgage, which can help make a less-than-perfect property more appealing.
11. Overlooking FHA, VA and USDA loans
If you're a first-time homebuyer with limited savings or poor credit, you may struggle to qualify for a conventional loan. Overlooking government-insured loan programs like FHA, VA, and USDA loans could lead you to believe that you have no financing options and delay your home search.
How this affects you: Delaying your home search could cause you to miss out on potential properties or to pay more for a home as prices continue to rise.
What to do instead: Explore the FHA, VA, and USDA loan programs to determine if you are eligible. FHA loans require a minimum credit score of 580 and just 3.5 percent down payment, while VA loans offer no down payment for eligible service members and their spouses. USDA loans are designed for low- to moderate-income borrowers and may not require a down payment. Researching these options can help you find a loan that suits your needs and allows you to move forward with your home search.
12. Underestimating the Additional Costs of Homeownership
When you become a homeowner, it's not just about paying for your monthly mortgage. There are numerous other expenses you need to take into account such as property taxes, mortgage insurance, homeowners insurance, hazard insurance, repairs, maintenance, and utilities. If you fail to consider these costs, you may end up with a monthly budget that's stretched too thin.
How this affects you: A Bankrate.com study shows that homeowners pay an average of $2,000 per year on maintenance services. If you don't have enough savings, you could end up in a financial bind.
What to do instead: Work with your lender or agent to calculate taxes, insurance, and utility bills. Obtain quotes from different insurance providers to compare prices. Aim to set aside at least 1 percent to 3 percent of the home's purchase price annually for maintenance and repair costs.
13. Failing to arrange gift funds
Gift funds from family, friends, employers or charities can be used towards a down payment for many loan programs. However, not planning who will provide this money and when it will be given can complicate the loan approval process.
How this affects you: If a buyer enters into a contract to purchase a home with an expectation of receiving gift money, and the gift money fails to materialize, they risk losing their earnest money deposit. Therefore, it's important to confirm that the gift giver is ready and able to provide you with the gift before you start shopping for a home.
What to do instead: Have a clear and honest discussion with anyone offering gift money about the amount they are willing to give and when you can expect to receive the funds. Keep documentation of the transaction, such as a copy of the check or electronic transfer, to prove the exchange of funds between the gift giver and you. Lenders will verify this through bank statements and a signed gift letter.