Here are some of the biggest pitfalls to avoid:
Mistake #1: You’re in the dark about your own credit history and finances.
“A lot of first time buyers don’t know what they’re qualified for or how much money they can actually spend,” Anarumo says. “Many don’t know what their credit score is.” Without a firm understanding of your financial situation, you could be blindsided when meeting with a mortgage lender.
Some of the main factors to consider when you’re budgeting for a home include:
- Your existing debts such as car payments or student loans. Generally, lenders will prefer that if you take out a mortgage, your debt-to-income (DTI) won’t exceed 43%.
- Your credit score, which helps to determine what type of deal a lender is willing to give you on a mortgage based on your past history of paying off debts. A lower credit score translates to a higher interest rate, to account for the perceived risk the lender takes on.
- Your income, which factors into your DTI ratio and in large part determines how much housing you can comfortably afford. As a general guideline, your housing payments including taxes and insurance shouldn’t exceed 30% of your total income, though this can vary based on your individual cost burdens.
If you haven’t looked at your credit in awhile, you’re entitled to order a full credit report at no cost from each of the three main credit bureaus (Experian, Equifax, and TransUnion) every year. You can order one from AnnualCreditReport.com for a quick credit health check. You don’t need perfect credit to buy a home, but if your credit score needs some improvement to secure a better mortgage rate, you can take steps to raise it before buying a house.
In addition, you can run your information through HomeLight’s Home Affordability Calculator which takes into account factors like your current savings, gross annual income, and monthly debt to provide an estimate of how much house you can afford in your city.
Mistake #2: You go with the first lender you meet without shopping around.
Anarumo suggests meeting with two local mortgage lenders and two or three online lenders to compare and contrast their offerings and rates.
“Talk to the different mortgage brokers, answer their questions and then ask them about the specifics of the different mortgage programs that are out there,” he advises. You’re generally looking for the lender who, out of the ones you approach, will offer you the lowest mortgage rate, the least amount of fees at closing, and the best array of programs for your needs.
Mistake #3: You take on too much house.
Buyers often just focus on their monthly mortgage payment when considering the costs of a home. Anarumo advises that you also “look at what it costs to cut the grass, the utilities, and all of the expenses around the property.”
For general upkeep, you should budget 1% of the purchase price of the home annually. You’ll want to consider other hidden expenses like taxes, insurance, and HOA fees that can put you over the edge. There’s nothing fun about buying the house of your dreams then eating ramen in it every night because your mortgage payment consumes your paycheck.
Mistake #4: You forgot about closing costs.
On top of the down payment, you’re on the hook to pay closing costs, which typically add up to between 2%-5% of the loan amount to cover expenses like lender fees, attorney fees, the appraisal and home inspection, taxes, and insurance. Don’t forget these costs can add up fast, and you’ll need them liquid at the time of closing. Closing costs should always be factored into your buying budget.
Mistake #5: You ignore referrals and advice.
Top-selling Sarasota, Florida real estate agent Lori Cashi, who’s part of The Cashi Team, loves helping first-time buyers find their house. But a recent experience with one left her team scrambling last minute.
After referring three home inspectors Cashi could personally vouch for, the buyer went with one cheaper that she found online. The inspector failed to pull permits for work, and missed some obvious issues with the home that would have jeopardized the buyer’s mortgage.
“He had great reviews online,” Cashi reasons. “But Yelp isn’t the same as personal referrals and trusted teams.”
Pro tips for buyers beginning their search
Stay on top of the process with these tips:
Tip #1: Get pre-approved and set your price range before you shop.
“The best time to figure out how much you can afford is before you start looking at houses and falling in love with them,” Anarumo suggests. Work on the hard stuff, like setting your budget and getting pre-approved, first. The house hunt can come after, and with it, a sense of relief because the properties you step foot will ideally be in your price range.
Tip #2: Be open to a home’s potential.
“I find that first time buyers, because of their inexperience, don’t look beyond what they’re seeing as to what it could be,” Anarumo says. Envision the less-than-pristine home you’re touring with a few cosmetic changes. Imagine tearing down the dated wallpaper, updating the counters, and slapping on a fresh coat of white paint. Small cosmetic updates can make all the difference, as long as you keep an open mind.
Tip #3: Don’t be afraid to ask questions.
The most successful buyers are the ones who don’t assume they know it all, Anamuro explains. “I had this buyer that didn’t have a clue, but asked a whole lot of questions. This person actually realized she wasn’t an expert, and I think that’s one of the reasons why everything went so well.”
Header Image Source: (Brooke Cagle / Unsplash)