Purchasing your first home is both an exciting endeavor and a complex process. Between today’s low housing inventory and securing a manageable interest rate, navigating the real estate market for the first time can be a challenge.
To help you gain insight into the process and current market, we tapped New Jersey-based Compass realtor Caterina Peters to share the top mistakes first-time home buyers make. According to Peters, a successful home buying process starts with assembling the right team of professionals, including a skilled real estate agent, a good lender, home inspector and real estate attorney. Thorough research of the local neighborhood, the types of loans you may qualify for and all upfront and potential future costs is also of utmost importance.
Although there is some apprehension about taking the plunge into homeownership given today’s high mortgage rates, Peters says, “Because of limited inventory and the rising rents, people are still definitely very eager to get into a home.” Since it doesn’t look like interest rates will drop anytime soon, Peters says creative financing and flexibility are key. Keep reading for her advice to avoid unnecessary stress both now and down the road.
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🛑 Shopping before getting pre-approved for a mortgage
Before you start perusing Zillow, speak with a lender to get pre-approved for a mortgage. “This way, you know your budget and types of properties to view within your comfortable price range,” Peters says. Having a concrete number in mind is an essential starting point, as it focuses your house search and provides a sense of future costs, including monthly mortgage payments and closing costs.
🛑 Consulting with one lender
“Speak with a few lenders to shop around and see who is a good communicator and will guide you through the process, since there will be a lot of paperwork and questions to answer,” Peters advises. Just as you shop around for the right house, shop around for the right lender and compare their offers to find the best deal. “Often, when working with a large lender, you may be passed off as an anonymous number and not have a point of contact when questions or concerns come up. In this process, relationships are of the upmost importance, so you are comfortable,” Peters adds.
🛑 Settling for an incapable realtor
Navigating the complex process of finding and purchasing your first home is made infinitely easier with the help of a good real estate agent. “Connect with a knowledgeable and ethical real estate agent who will guide you through the process, and suggest different types of properties and areas based on your needs and price range,” Peters says. She adds that the real estate agent is also the person who sets expectations during the process and negotiates a good deal on the best property for you.
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🛑 Choosing an incompetent inspector
In addition to picking the right real estate agent and lender, Peters stresses the importance of another key role on your team: the home inspector. “Your home inspector is an important person on your team, as they will thoroughly inspect the property to let you know of any potential repairs or defects.” This can save you a lot of money down the line, whether you choose to walk away from a property when an inspection reveals serious concerns or you gain leverage to negotiate with the seller.
🛑 Waiving the home inspection
What’s worse than choosing the wrong inspector is waiving the home inspection altogether. While it may seem like a good way to save money upfront or to get the seller to reduce the asking price, it’s highly risky. You’d be purchasing the property without full knowledge of its condition, which can be costly in the long run.
🛑 Committing to high monthly payments
“Your mortgage professional will ensure that you purchase the home with a loan product that has the best interest rate and terms so the payment is comfortable,” Peters says. Committing to higher monthly payments beyond your family’s budget is where many people make a major mistake.
🛑 Jeopardizing your credit score during the buying process
Your credit score is an important financial component of the home buying process from start to finish. A lender will run a credit report to help determine the mortgage amount you are pre-approved for, but it doesn’t end there. Before you close on the home, your credit report will be pulled again to ensure everything is in order and the sale can proceed as planned. For this reason, maintaining a good credit score is of utmost importance. Also, it’s best to avoid opening or closing bank accounts, applying for new credit cards and making any large purchases during this period.
🛑 Overlooking the neighborhood
While you may have found the house, keep the whole neighborhood in mind during your search. You can renovate and upgrade a home, but you can’t change the neighborhood or location. Consider the type of community you appreciate, the home’s location and its proximity to your work, schools and amenities. You should also think in terms of resale value when viewing properties.
🛑 Not working with a good real estate attorney
Some states require a real estate attorney to complete the transaction, in which case it pays to do your due diligence and pick the right one. Keep in mind that this will be an additional cost. “Your real estate attorney’s role is important, as they negotiate the key terms of the contract and add clauses that will protect you during the purchase process,” Peters explains. This is another reason why working with a knowledgeable real estate agent is essential, as they can recommend a trusted real estate attorney to join your team.
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🛑 Failing to research loan types
People often think a 20% down payment on a home is the standard. However, that’s not necessarily the case, especially if you are a first-time homebuyer. There are FHA loans, which allow you to put down as little as 3.5% if you meet certain financial requirements. There are also VA loans that don’t require a down payment for veterans, and USDA loans through the Department of Agriculture that don’t call for a down payment on properties within certain areas. You can also take advantage of various first-time homebuyer programs, whether they are federal, state or employer-based.
🛑 Being uninformed about the upfront costs
Get informed about the upfront costs involved in purchasing your first home. The last thing you want are surprises along the way. Ask your real estate agent for a list of costs to expect during the process and even after you purchase the home. Along with the down payment, there are other costs such as a home inspection or a real estate attorney’s fee.
🛑 Using up your savings
Buying your first home is likely the biggest purchase you have ever made, but blowing through your entire savings to close the deal is not wise. Unexpected expenses arise even long after you close on the property. If you are transitioning from a small studio apartment, furnishing your new home may be expensive. Or, if you’ve never had a backyard and now have one, maintenance and new equipment will require extra purchases. Additionally, this is also where a home inspection comes in — it gives you an idea of the cost to replace or renovate things around the house, as well as a time frame for when those investments will be necessary.
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🛑 Dragging your feet or moving too fast
Timing is everything when it comes to buying a home. Sometimes, first-time homebuyers wait so long to find the “perfect” house that they miss out on good homes and end up over-paying when they’re suddenly in a pinch to move. On the other hand, others who make a hasty decision miss the opportunity to save more for a down payment. They might also settle on a home they don’t love just because they were in a hurry.
🛑 Underestimating renovation costs
While purchasing a fixer upper may seem appealing as both an investment and an exciting project, being realistic about renovation costs is essential to avoid future frustration and debt. Speak to a knowledgeable contractor to get a ballpark estimate for the work that needs to be done, evaluate what jobs you need to hire professionals for and those you can take on yourself. Be wise about how much you invest in the property to ensure it’s worth it in the long run — both in a personal sense and in terms of resale value.
🛑 Going into the home buying process without an open mind
“Do your research and explore options,” Peters says. “Sometimes, when you think outside of the box, you may end up finding something that is perfect for you that was not on your radar.” Instead of fixating on a specific type of house or a certain neighborhood, be a bit flexible. Visit a variety of properties within your budget to make a well-informed decision to find your dream home.
🛑 Letting a high interest rate deter you
“Don’t get caught up in what you think is a high interest rate,” Peters says. While you need to consider whether you can realistically afford the purchase or not, the realtor says you shouldn’t let what seems like a high interest rate stop you from buying your first home. Given the interest rate trends over the last few years, Peters doubts we’ll see the return of 3% or 4% rates anytime soon — perhaps we’ll see 5% rates at best. Instead of letting this discourage you, Peters suggests getting creative with financing, whether that means doing an interest rate buy-down for the first year or two or waiving certain contingencies.
🛑 Forgetting to budget for soft costs
When it comes to purchasing their first home, people typically budget for monthly mortgage payments but forget to budget for soft costs. Peters says these include everything from future tax increases and insurance fluctuations to preventative maintenance and potential repairs. “People budget for new furniture and all the fun stuff, but you should definitely put something aside for a rainy day if there’s a leak or repair you weren’t anticipating,” Peters notes.
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🛑 Purchasing a home without conducting local research
Before you make the purchase, Peters advises doing your local research. While your realtor will guide you through the home search and purchasing process, Peters shares there are certain things that, as licensees of the state, real estate agents cannot speak to — such as safety or quality of schools. It’s the potential buyer’s job to dig deeper and learn about the local area. Here are key areas Peters suggests researching:
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Any kind of environmental issues
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Safety (including checking the registered sex offender list)
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Schools (including school board funding, types of programs available and programs they plan on cutting)
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New residential or manufacturing developments being built
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If it’s a condo, the building’s condition and financials
“It’s really important to do your due diligence to find out what’s beneath the surface of the community you’re looking at,” Peters says.
🛑 Only visiting the neighborhood during the day and on a weekday
A neighborhood may look very different on Monday morning than it does on Friday night or Saturday afternoon. For this reason, Peterson always recommends visiting the neighborhood at night and on a weekend. “Because then you can see who’s home, who’s not, when people are not at work, and what they’re doing,” Peters says. Consider things like music that’s being blasted, people hanging out outside, trash being left around and what’s happening in your potential neighbors’ backyard.
🛑 Not thinking long-term
People are often eager to renovate and reconfigure a house to suit their needs and while that’s not a bad thing, doing so without thinking long-term can cause issues down the road. “You can never really anticipate the changes that life may bring to you, whether that’s a new partner or changes in family dynamic [and] if you renovate, you don’t want to go too specific with your finishes because that may not be appealing for resale value to potential buyers,” Peters says.
Similarly, if you reconfigure your new home too specifically, the new layout may not work for you or potential buyers in the future. “For instance, if you have a house and you remove all of the bathtubs, that may not be great for resale value in the future for a family that wants to come in that needs one bathtub at least if they have children,” Peters explains.
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