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Learning how to buy a home for the first time is an exciting, but nerve-wracking, experience.
It can also be a minefield, with many opportunities to trip up the unwary.
The best way to ensure a smooth first-time home-buying experience is by conducting research and performing careful due diligence.
While purchasing a home for the first time is a major life event, remember that every homeowner was once a first-time buyer. And with millions of homes being purchased each year, you can bet that nearly every mistake that could be made, has been made.
Here are 10 common mistakes that cause many prospective homeowners to overspend that you’ll want to avoid.
1. Not Getting Pre-Approved
Before beginning the house-shopping experience, nail down a firm spending amount with a mortgage broker. It is important to become pre-approved (completing an official mortgage application) and not just pre-qualified (receiving an estimate from a lender on how much can be borrowed). Pre-approval and pre-qualification are two very different things.
During the mortgage pre-approval process, a mortgage company will check out the prospective buyer’s finances, and will require only an appraisal and a title search. Pre-approval makes becoming a first-time buyer a much smoother process.
2. Not Shopping Around for the Best Lender
While pre-approval is important for any buyer, shopping around for the best rates is also key to the process.
Reducing interest rates by even a quarter of a percentage point can mean future savings of thousands of dollars. Because interest rates will likely increase eventually, try to lock in a low rate now to help save money in the long run. Utilize free, user-friendly websites like LendingTree to compare lenders and interest rates to get the best deals.
3. Not Factoring in Everyday Homeowner Expenses
Even after signing the paperwork on a new home, first-time buyers will still have to face additional expenses. Two major ones are property taxes and homeowners insurance. In addition, many residential homes are also located within subdivisions that are overseen by homeowners’ associations, which charge everyone living in the neighborhood a HOA fee.
Before making an offer on a house, research the area’s water/sewer rates and typical heating and electricity bills. If the house has central air conditioning, ask the homeowner about the average cost of the electric bill during the summer. Homeownership also comes with the cost of basic maintenance and repairs; there will no longer be a landlord to pay for burst pipes or broken appliances.
4. Becoming House-Poor
A lot of first-time homebuyers make the mistake of spending their maximum approval amount on a house. But just like with a credit card, it isn’t usually a good idea to max out to that monetary limit.
It is better to go over existing and future monthly expenses carefully to see how much can be added in without sacrificing a life outside of mortgage expenses. Find a balance between living in a nice home and losing sleep at night, stressing about making house payments.
5. Forgetting About Additional Fees
A monthly mortgage payment isn’t the only cost in the home-buying process. This venture will also include the mortgage application process and the sale closing. These additional expenditures will set the buyer back between 2 and 5 percent of the purchase price. They will include:
- Loan origination costs
- Legal fees
- Home inspection fees
- Title insurance
- Escrow charges
- Recording fee
Don’t forget points, which are paid in exchange for a lower mortgage rate. Private mortgage insurance will cost less than 20 percent of the purchase price, and there are ways to waive or reduce those insurance costs; find out more about that process from the mortgage broker.
6. Not Checking the Property Thoroughly
Even if a house appears to be in perfect condition, inspect it as carefully as possible before making an offer.
Professional home inspections cannot be done until an offer is made, but careful visual inspection – and videography to view carefully later, if the homeowner allows it – can help a potential buyer become aware of any red flags.
Some things to look out for include:
- Cracks in the foundation
- Odd odors
- Any water stains
- Mud tubes near the foundation, which could indicate the presence of termites
If any of these red flags become apparent, don’t make an offer on the house. Repairing the damage could cost a tremendous amount of money, and banks are unlikely to approve loans for this type of project.
7. Not Doing a Zoning Check
If that dream home is located in the middle of the country, surrounded by open space, great – but check the local zoning laws before making an offer.
That farm field two lots over could soon become the site of an office building, or the zoning may allow development that quickly changes the area’s character. The same holds true in already developed neighborhoods. Find out what is and is not permitted around a future home. Any upcoming new developments – both positive and negative – will affect a home’s value.
8. Not Scheduling a Home Inspection
First-time buyers purchasing an older home are probably aware of the need for a home inspection. But those home inspections are good ideas even in the event of new construction.
Just because a house is brand new doesn’t mean that everything was done correctly. Local building codes refer to minimum specs – and building code officials could have missed items.
9. Not Getting Everything in Writing
When purchasing a previously occupied home, get in writing which fixtures and appliances are included in the final sale and which are not. State laws vary, but many states require homes to be sold with working stoves.
It would be distressing to do a walk-through before closing and realize that the high-end stove that was previously installed in the kitchen was replaced by a cheap model. The same holds true for lighting fixtures and other home features.
10. Contingency Clauses
Unexpected things happen. One of the more common first-time homebuyer mistakes is failing to cover all of the important bases.
Have a contingency clause attached to the real estate contract that will allow either party to back out of the contract under certain conditions. That way, a buyer who is suddenly let go from a job or is transferred to another part of the country during the home-buying process will not be stuck with the purchase.
Depending on individual state laws, real estate agents or attorneys can write up contracts that include contingency clauses protecting the buyer. Sellers will also have clauses included in the contract that protect them.
As soon as financing is lined up and research is completed, it’s time to get out there and start shopping for a new home. Soon, it will be time to graduate from the prospective buyer role to becoming an official homeowner.
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