4 Common Mistakes Made by First Time Homebuyers
About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use the The DREAM Financial Planning Process ™ to help our clients achieve their goals.
Buying your first home is probably one of the largest financial decisions you will make in your adult life. A home is not only a place to live but an investment, and when done properly can provide you with some security. However, there are many steps that you will need to take to complete your home buying journey, and there are many missteps that commonly occur with first-time home buyers. Check out the four most common mistakes that first-time home buyers make that can lead to problems.
1. Making the Assumption That You Have to Have 20 Percent Down
A common assumption made by many first-time home buyers is that you will need to save at least 20 percent to put a down payment on your home. This can lead many buyers to push off home ownership, or purchase a home that is less than they wanted due to only having so much saved. The reason that you will hear the common 20 percent down rule is that this is typically the amount you will need to put down on your home to avoid paying private mortgage insurance. There are multiple types of loans that will allow you to put less down on your home as long as you are willing to pay a monthly PMI cost to protect the lender in the event of a default. Some loans will allow you even to put as low as three percent down, which can free up your cash flow, to make improvements, pay down high-interest debt, or grow in your retirement account.
2. Letting Credit Get Out of Control
Credit plays a critical role in getting approved for a mortgage and also securing the lowest rate you can. Many first-time buyers make the mistake of cleaning up their credit in order to get pre-approval and then open new lines or rack up existing lines shortly after getting pre-approved. Whether this is to get on top of bills or buy new furniture or improvements for your new home, it can cause problems when it comes time to close on your home. Even if you are pre-approved, your lender will pull your credit shortly before closing to make sure that your financial picture is the same. Opening and closing accounts, taking out new loans, or running up your credit, can lead to score drops, which can jeopardize your loan processing.
3. Not Calculating the True Cost of Homeownership
When determining whether or not you can afford a specific home, many first-time homebuyers will look at the monthly mortgage cost, cost of homeowner's insurance, and the property taxes that they will be responsible for paying. What many first-time homeowners fail to take into account is how much the home they choose will cost them on maintenance and repairs and utility costs. These unrealized expenses can lead to a budget that exceeds what you may have originally expected.
4. Shopping Before Addressing the Mortgage Issue
With the excitement of getting ready to purchase your new home, you may start shopping before you have secured pre-approval for a mortgage. This can be problematic as you may become emotionally attached to a property before you even know if you can afford it. You also could find the perfect house, but need additional time to get your finances up to where they need to be in order to secure a loan, which can result in losing the house you chose. By getting pre-qualified for a loan before you start shopping, you will know exactly what you are approved for, will be able to address any issues with your finances or credit that need clearing up, and will make the process smoother when you find the house you are looking for.
Don't let the common first-time homebuyer mistakes listed above lead to problems with your start at homeownership. Being prepared and avoiding common pitfalls can give you the best chance of having a successful home buying experience.
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