Buying A Home? Avoid These 6 Common Mistakes
Hanna KielarAugust 23, 2019
There was a time when first-time buyers bought half of all homes sold in the United States. That’s changed. In the summer of 2019, Point2Homes published a report showing that first-time buyers accounted for just 33% of all home sales in the United States in 2018. That share stood at a far larger 50% in 2010, according to Point2Homes.
Why the drop? Point2Homes' study cites increasing home prices, a lack of homes available for sale in many markets and lenders who are more hesitant to lend to borrowers with weaker credit. The growing amount of student loan debt that younger buyers often owe hurts too.
The message is clear: Buying a home for a first-timer can be challenging today. It's easier to make a mistake, and because homes are more expensive those mistakes can be costly.
Fortunately, it's still possible for first-time buyers to find that perfect home and to not overspend while doing it. We spoke to real estate professionals across the United States to uncover the most common mistakes all home buyers make and how buyers can avoid them.
Here are six of these common buying mistakes to avoid and what to do instead.
They Look For Homes Before They Line Up Financing
If you're like most buyers today, you'll need a mortgage loan to finance the purchase of your home. This means you need to get preapproved for a mortgage loan before you start searching for a home.
Yes, it's more fun to tour homes for sale. But getting preapproved tells you exactly how much home you can afford to buy (which prevents you from overspending on a new residence) and makes you a more attractive buyer to sellers.
In a preapproval, you'll meet with a mortgage loan officer who will run your credit. You'll also provide this lender with copies of financial documents such as your recent paycheck stubs, tax returns, bank account statements and W-2 forms. Your lender will use this paperwork to determine how much money it’s willing to lend to you.
If the lender will only approve you for a maximum loan of $200,000, you won't waste time looking at homes that cost $300,000. Also, if multiple buyers are interested in the home you want to buy, you'll gain an advantage if you have a preapproval letter. Sellers prefer working with buyers who already have financing lined up. This makes it less likely that the real estate sale will fall apart.
"Start the process early," said Maxine Geller, a real estate agent with Coldwell Banker Residential Brokerage in Del Mar, Calif. "If you end up in a multiple offer situation, a home you love can be lost to a buyer who has their ducks in a row with a lender."
They Don't Check Their Credit
Did you know that you’re entitled to one free copy of all three of your credit reports (courtesy of national credit bureaus Experian, Equifax and TransUnion®) each year? You are, and you can order these reports from AnnualCreditReport.com.
Don't forget to do this before you start hunting for a new home. Your credit reports list the money you owe on your loans and credit cards and whether you have any late payments, accounts in collection, recent bankruptcies or other financial mistakes. Certain mistakes stay on your credit reports for 7 years such as late loan or credit card payments, foreclosures and certain types of bankruptcy filings. Filing for Chapter 7 bankruptcy stays on your credit reports for 10 years.
These negatives will drag down your three-digit FICO® credit score, which could result in a rejection from lenders when you apply for a mortgage. A low score also boosts your odds of getting tagged with a higher interest rate on your loan.
Did you order your report and see plenty of late payments, high credit card balances and other negatives? You'll need to pay down your credit card debt and work on developing a more positive history of on-time payments. If you do, your credit score will improve. This can leave you with lower interest rates and a smaller monthly mortgage payment.
If you don't study your credit? You might be surprised by a mortgage loan rejection.
"I've talked to many people who are shocked when they go apply for a loan and either get rejected or have to pay a higher interest rate than they were hoping," said John Horton, Director of Strategic Growth at Chicago's Midwest Lending Corporation. "Make sure you are monitoring your credit well in advance."
They Have Loose Lips
Sometimes it pays to be quiet when you’re touring a home for sale, especially if the sellers or the real estate agents representing the sellers are in the house.
“Buyers often disclose too much information to the seller or the seller’s agent, which puts them into a disadvantage during negotiations,” said Konstantin Zaliznyak, an agent with New York City brokerage firm Triplemint.
For instance, if you’re touring a home and you mention in front of the seller’s agent that you want to buy before the school year starts, the seller’s agent might relay that information to their clients. These clients will then know that you want to close quickly and might be desperate enough to pay a higher price.
The smarter move? Never say anything negative or positive about yourself or a home you’re touring until you’re alone with your own real estate agent.
They Don't Figure In The Closing Costs
Most buyers know they have to come up with a down payment when purchasing a home. They'll work hard to save these dollars whether they come up with a down payment of 3% of a home's purchase price or 20%. But these same buyers often forget to save up enough for their closing costs.
Mortgage lenders and third-party providers, such as title companies, charge closing fees to cover the costs of originating a loan. These fees can vary, but it's not unusual to pay 2%–5% of your loan amount in closing costs. For a home costing $200,000, that can come out to $4,000.
"In many markets, it's not customary for sellers to alleviate this burden," said Nadia Anac, a real estate agent with Keller Williams Tampa Central in Tampa, Fla. "This is why it's so important to work with a real estate professional and mortgage lender who can educate their clients about the buying process ahead of time."
They Get Too Emotional
Chris Baumann, Team Leader For Loans and Investments with the Sacramento, Calif.-based Socotra Capital, said that buying a home is often an emotional process for buyers. It's easy for them to get overly excited when they see a home they like.
The problem comes when excitement causes buyers to overlook the negatives of a home. Baumann also said that when buyers fall in love with a house, they might overlook that it sits on a busy, noisy street or that it's within earshot of a roaring freeway. Buyers who get too emotional about a house might ignore the railroad tracks that run behind its backyard or the traffic that zooms past it each afternoon when the nearby high school lets out.
"These are all mistakes in my mind, and they often stem from people who become emotionally closed off to alternatives," Baumann said. "They've found the house they want, and they're going for it no matter what."
The better move? Don’t just study the house itself. Look at the neighborhood too. If don’t like it you won’t be happy, no matter how nice the house is.
They Skip The Home Inspection
Dave von Beck, a real estate attorney with Levy, von Beck, Comstock in Seattle, said that waiving the home inspection can be a big financial mistake for buyers.
After you sign a contract to purchase a home, you have the right to request a home inspection. A home inspector will tour the property you wish to buy looking for problems. If the inspector finds any issues, you can request that the sellers fix them, lower the home's asking price or provide you with credit you can use to pay for the repairs yourself.
Other buyers order an inspection but then ignore any serious issues that the inspector finds. von Beck said buyers then have to deal with these issues and the big repair bills that come with them.
"Don't succumb to the urge to skip inspections," von Beck said. "Waiving the home inspection is always a bad idea."