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First-Time Home Buyer Tips And Mistakes To Avoid

Rachel BurrisNovember 17, 2020

*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

If you’re getting ready to buy your first home, you’re probably experiencing a range of emotions, including anxiety. Buying a home is an enormous investment, and not knowing what to expect can make the journey all the more nerve-racking. The best way to fight your fears is to learn about the ins and outs of the process ahead of time. This article will provide you with 13 first-time home buyer tips and insight into how to avoid common mistakes.

1. Save For A Down Payment And Closing Costs 

Even if you get a loan to pay for your new home, you’ll still have costs you need to pay, which aren’t covered by your mortgage. The down payment is the amount of money you need to pay upfront in order to buy a home. This large, one-time payment will be a certain percentage of the purchasing price of the home.

You may have heard that you need to put 20% down, but thankfully most lenders don’t require such large down payments anymore. These days, you can usually get away with putting 3% – 5% down for conventional loans and 3.5% for FHA loans. If you qualify for VA or USDA loans, you won’t be required to make any down payment.

Although many home buyers would prefer to put down as little money as possible, there are advantages to putting down more. Borrowers who make larger down payments have lower monthly mortgage payments. They also tend to receive better interest rates because they’re viewed as less of a risk to lenders.

To minimize the risk, lenders will require borrowers who are unable to make a 20% down payment to pay for private mortgage insurance. PMI is rolled into your monthly mortgage payments and used to protect the lender in the event you default on your loan. 

So, you should strive to make a 20% down payment on your home. However, you must ensure that you leave yourself with enough savings to cover closing costs (and potential emergencies). Closing costs are the fees that you’re charged for processing and servicing your loan. These costs are also presented as a percentage of the purchasing price. 

They usually amount to about 3% – 6% of the home price; however, they vary depending on your area and loan amount. After you apply for a loan, your lender will send you a Loan Estimate form. This three-page form will itemize all terms and costs associated with your loan, so you know exactly how much money you will need.

2. Get Your Credit In Shape

Before you jump feet-first into the process, examine your finances to ensure that you’re actually ready to buy a house. An important indication of your readiness is your credit score.

It’s the first thing that mortgage lenders look at when determining whether you qualify for a loan. Your credit score indicates how large a risk banks would be taking on by lending to you.

Of course, the higher your credit score, the better your chances of getting a loan. But people with higher credit scores also tend to obtain better mortgage terms and rates.

Even just a few points can lead to a significant difference in interest and fees. So, before you go any further in the process, you should review your FICO® Score to see if it’s high enough to meet lenders’ requirements.

Typically, borrowers need to have a score of 620 or higher to qualify for a conventional loan. If yours is below this range, there are ways that you can improve your credit score prior to getting a mortgage.

The first step is to make sure that you’re paying all of your bills on time, as the timeliness of your payments accounts for 35% of the calculation of your credit score. Avoiding late payments will not only improve your credit score but also reassure lenders that you’ll be responsible with your mortgage payments.

Next, you should try to pay off as much of your debts as you can and work to keep your credit card balances low. This step will enable you to lower your credit utilization and increase your available credit, which accounts for another 30% of your score’s calculation. You should also avoid making large purchases and opening new credit cards during this time.

3. Be Realistic About How Much Home You Can Afford 

After you’ve checked your savings, it’s useful to calculate how much house you can afford. Of course, your lender will tell you how much they’re willing to lend you, but it’s not always wise to borrow the full amount. Figuring out your budget ahead of time will help you ensure that you don’t overextend yourself and borrow more than you can afford to pay back.

There are a few different methods you can use to figure out how much house you can afford. However, the rule of thumb is that your housing expenses shouldn’t exceed 28% of your gross monthly income (your salary before taxes), and your total monthly debt payments shouldn’t be greater than 36%.

4. Take Advantage Of First-Time Home Buyer Programs

It would be a mistake to purchase your first home without researching the resources available to you. There are actually a number of first-time home buyer programs and grants for which you may qualify. Obtaining a grant can help you pay for your down payment and closing costs. 

To find programs appropriate for your circumstances, it’s a good idea to explore the Department of Housing and Urban Development’s website. HUD has a list of available grants and other resources that are organized by location, taking some of the guesswork out of eligibility.

5. Compare Lenders To Find The Right One For You

As a first-time home buyer, you should always shop around before choosing a mortgage lender. There are not only disparities in lenders’ customer service but also in the mortgage options, interest rates and closing costs they’re willing to offer. 

After speaking with a few different lenders, ask them to provide you with a Loan Estimate, so you can compare the differences between each lender’s offerings. The Loan Estimate form is standardized, which makes it easy to identify which lender is willing to offer you the best terms and lowest costs. 

However, you should consider more than the bottom line when choosing a lender. Remember, you could be working with them for 15, 20 or 30 years. That’s why it’s crucial that you choose a company you trust, a company that makes the process as simple as possible. When researching a company, consider:

  • Its speed: Some lenders take longer than others to close loans, which can be problematic, especially in a competitive market. 
  • Its client satisfaction ratings and customer service awards: The experience of a lender’s previous borrowers will give you invaluable insight into what you should expect. Therefore, you should make sure to read plenty of reviews.
  • Its communication habits: Questions and issues are likely to arise throughout the process – and the life of your loan – so you want to ensure that your lender responds to all of your inquiries with urgency. Look for companies that respond within 24 hours and have the capability to do business online.

6. Get Preapproved Before You Start Your Search 

Although it may seem counterintuitive, it’s vital that you get preapproved for a mortgage before you start house hunting. Before you can determine your price range, you must know how much money you’re qualified to borrow. Furthermore, the market can be competitive and having a preapproval letter ready when you make an offer will demonstrate that you’re a serious buyer.

When there are multiple offers on a home, sellers are more likely to choose buyers who already have preapproval. A preapproved buyer typically takes priority because there’s less of a risk that their offer will fall through due to issues with financing. Having your financing ready may also give you more power when negotiating the purchase price, especially if the seller is looking to close quickly. 

Be aware that getting prequalified is not the same as being preapproved. To become prequalified, your lender uses your self-reported financial information to estimate how much money you can borrow. When obtaining preapproval, your lender will verify your financial information and credit history to provide you with a more reliable estimate of what you can afford.

To get your preapproval letter, you’ll need to provide proof of your income and assets, verification of your employment, and personal information, like your Social Security number. This information will be used to run a credit check.

7. Work With A Trusted Real Estate Agent

Sometimes, people balk at real estate agents’ commissions and try to handle their transactions without representation. But that’s a huge mistake, especially for first-time home buyers.

Real estate agents don’t simply find available properties and schedule showings for home buyers. They also act as advocates for their customers, ensuring that they ask the right questions, receive the necessary disclosures, come up with competitive offers and appropriately negotiate transactions. And since commissions are taken out of the purchasing price of properties, buyers get to work with real estate agents for free.

The experience and skills that real estate agents provide are invaluable, but not all agents are created equal. It’s crucial that you spend some time finding the right agent.

8. Make A List Of Must-Haves And Deal-Breakers

Once you’ve chosen your real estate agent, it’s time to have a serious discussion about the qualities you want and need in your home. You should think about:

Size: What’s your ideal square footage? How much space do you actually need?

Bedrooms and bathrooms: How many bedrooms are you looking for? Do you need to have the same number of bedrooms and bathrooms? 

Age and condition: Are you looking for new construction? Are you willing to put work into the home to improve its condition?

Home features: Are there any specific features that you must have, such as a garage, finished basement or open floor plan? 

Defining your priorities will help you communicate your needs to your real estate agent and ensure you don’t waste time looking at homes that are wrong for you. If you’re unsure of what your preferences are, don’t worry.

That’s what the search process is all about. As you see more homes, you’ll have an easier time pinpointing what exactly you want.

However, just as you make a list of your priorities, you should also start thinking about what you’re willing to sacrifice. Despite the number of homes on the market, it’s highly unlikely that you’ll be able to find your ideal home available and in your price range.

A list of deal-breakers is also useful to create, so you can ensure your agent has a full picture of what you are and are not interested in. Some common deal-breakers include homes with limited accessibility, outdated kitchens, old roofs and lots on the highway. Figure out what you can’t live with, and let your agent know as soon as possible.

9. Consider The Neighborhood

Scouting out neighborhoods can be just as critical as touring homes. To choose the right neighborhood, you must do your research by taking drives, going for walks and speaking with residents. The quality of the neighborhood is important for its livability, as well as the resale value of the home. Here are some significant factors to consider when judging a neighborhood: 

  • Local crime rate: The safety of the neighborhood will determine how comfortable you feel living there. To find out if there have been crimes recently committed in the area, visit a crime reporting website, like SpotCrime.
  • School district: Even if you don’t have children, it’s useful to research the quality of the local public schools. Good schools will have high test scores and graduation rates, as well as low student-to-teacher ratios.
  • Amenities: The proximity of grocery stores, pharmacies, restaurants and healthcare facilities determine whether a neighborhood is convenient. Make sure you don’t have to travel too far from the home to find what you need.

10. Make A Competitive Offer

Once you’ve found a home that checks all the boxes, it’s time to make an offer. Just because the seller is asking for a certain price doesn’t mean that the home is worth it. So, to help you determine how much to offer the seller, your real estate agent will run a comparative market analysis.

This analysis will examine similar homes that have sold in the last 6 months to determine the fair market value of the home you’re interested in. Based on the fair market value and the amount of time the property has been on the market, you and your agent will come up with a competitive offer.

Keep in mind that your power to negotiate will also depend on the current strength of the market, the number of days the home has been listed and the number of buyers who are interested in the property. 

If there is little interest in the home, you may want to consider adding contingencies to your offer. Contingencies are provisions that are added to the purchase agreement, stating that the sale of the home is dependent on certain conditions being met. If the conditions are not met, the buyer has the ability to walk away from the contract without facing financial repercussions.

11. Get A Home Inspection

Hiring a professional, third-party home inspector will give you peace of mind by ensuring that there aren’t any undisclosed issues with the property. After performing the home inspection, the inspector will provide you with a list of all necessary repairs, as well as more minor issues that can be attended to in the future. If there are major repairs that must be made, you can negotiate with the seller to either complete the work prior to closing or deduct the required funds from the purchase price. If the seller refuses, and you have an inspection contingency in your contract, you’ll be able to withdraw your offer without losing your earnest money deposit. 

12. Negotiate With Confidence

There are often two negotiation periods that take place when buying a house. One occurs when you first make an offer on the property and the seller counters. This initial negotiation can go many rounds and involve haggling over more than just the purchase price. During this time, you may negotiate some or all of the following: 

  • Purchase price
  • Contingencies
  • Fixtures
  • Furniture
  • Closing and possession dates
  • Closing costs
  • Home warranty

The second round of negotiations takes place after the home is inspected. The inspection report will reveal all issues with the property, from significant damage to cosmetic flaws. You should review the report with your real estate agent to determine which items are the most pressing and costly to repair.

Once you have identified the items that are most significant, it’s helpful to speak with a contractor. The contractor will be able to provide you with an estimate for how much it will cost to make the necessary repairs. 

With this information in hand, you can return to the seller and negotiate with confidence. You can ask the seller to either make the requested repairs or provide you with the funds necessary to do the work yourself.

You’ll want to receive the latter, as it will enable you to ensure that the work completed is up to your standards. When receiving funds for repairs, you can ask that the seller provides a price reduction on the home or a closing cost credit.

13. Save For Additional Expenses

Homeownership is expensive, and you need to be prepared for a slew of new expenses. After you close on your home, there will be moving costs, mortgage payments, property taxes, utility bills, homeowners insurance and HOA fees that must be paid.

You’ll have to spend money to maintain your new home, and when things break, you’ll need to pay for the repairs. According to HomeAdvisor, the average home requires $1,105 of maintenance each year, and that number doesn’t account for unexpected emergencies.

The costs never end, which is why the process of purchasing a home both begins and ends with saving money. Just as you’ll set aside funds from each paycheck to pay for your mortgage principal, interest, taxes and insurance, you should save for the additional expenses that come with homeownership. Doing so may mean holding off on buying all that new furniture, but ultimately, you’ll be glad that you did.

Buying your first home is a major milestone. If you think you’re ready, you can start the process today!

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    Rachel Burris

    Rachel Burris is a writer covering topics of interest to present and future homeowners, as well as industry insiders. Prior to joining Quicken Loans, she worked as an English teacher for the New York City Department of Education and a licensed real estate agent for Brown Harris Stevens. She holds a bachelor's degree in creative writing from Bucknell University, a postbaccalaureate certificate in psychology from Columbia University and a master's degree in English education from Teachers College, Columbia University.