With mortgage rates continually hitting new lows and many real estate forecasters predicting a housing bottom at the end of the year, many renters are getting the urge to buy.
That leaves a housing market full of inexperienced, but interested buyers who need a little more help and guidance in navigating what will be for some the biggest purchase they ever make.
“There are two separate transactions happening here -- one to purchase a house, and one to finance the transaction,” says Keith Gumbinger, vice president of consumer loan site HSH.com. “One has a lot of emotion involved in it, which is fine, but the other is a financial transaction and should be treated with cold calculation and clear eyes. That’s easier said than done when things will be moving so fast and a lot of moving pieces are set into motion.”
To help you navigate the homebuying process without falling for some of the most common pitfalls, here are some of the most common mistakes new homebuyers make and how you can avoid them.
1. Trying to Rehab Your Credit Before You Buy
It may seem counterintuitive -- why wouldn’t you want to make sure your credit is in shape before you apply for a mortgage? But Credit.com’s Personal Finance Expert, Gerri Detweiler, says you can make some big mistakes if you try to do credit repair without consulting your mortgage loan officer first.
“Even paying down credit card balances, which is a good thing as far as your credit scores and debt ratios are concerned, could be a problem if it leaves you short the cash you need to qualify to get the loan,” Detweiler says.
What’s your best bet? Talk to your mortgage loan officer or a financial expert like a CFP before making any moves to build your credit score.
2. Not Thinking About the Future
Several credit experts we spoke to said this is key to finding the right loan and home for every homebuyer, not just newbies. But first-time homebuyers tend to not know what they want five or 10 years down the road, which is a major factor for not only the type of house you want (Will I need a nursery or a backyard?), but also the type of loan you need (Will I want a 30-year mortgage or an adjustable-rate loan?).
This applies not only to where you want to be in 10 years, but also to where you are financially right now. Can you afford a $500,000 house, or is $300,000 more realistic? These are the questions you need to ask yourself.
“Know your budget and stick to it,” says Chantay Bridges, a senior real estate specialist. “In doing so, this leaves you wiggle room for emergencies, salary fluctuations or anything else that may come along. Don’t increase your budget $100,000 because one house has a pool and the other doesn’t unless you can truly afford it.”
3. Not Doing Enough Research in Advance
Gumbinger, with HSH, says that many new buyers make the mistake of finding the home they want to buy before doing the research on how they will finance the purchase. Buyers will then sign a sales contract that gives them a period of time, often 10 days, to secure the financing for the home. This puts new buyers into an extremely small window of time in which they need to find the best rate and mortgage for a home they’ve already committed to buying.
“The time to make decisions about your mortgage needs is not during this 10-day window; at most, this is time to shop for rates and fees and such. Evaluating your credit, deciding on a product you prefer, how much downpayment you feel comfortable making, whether you want to pay fees/points (and/or how much) and even shopping for a lender (getting pre-approved) should happen well in advance of even wandering through the market looking at houses,” Gumbinger says.
He suggests prospective homebuyers start their research six months out to get a feel for what they’re looking for.
4. Assuming the Good Faith Estimate Is What You'll Actually Pay
The Good Faith Estimate is a form lenders must provide potential borrowers to make them aware of the closing costs that this particular lender will charge them. However, this may not be what you actually pay at closing time.
Ryan Himmel, CPA and founder of tax advice site BIDaWIZ, says the key to figuring out how much you’ll actually pay at closing is shopping around.
“Sometimes the Good Faith Estimate provided by the lender after you applied for the loan can be significantly different from the the actual cost at closing,” Himmel says. “To avoid this problem shop around and compare the Good Faith Estimate provided by the lender with that of 2 or 3 other lenders. If there is a significant disparity in estimates, then request an explanation from the lender to determine if you would like to move forward.”
Himmel says closing costs should be around 3% to 5% of the loan amount.
5. Thinking the Agent Works for You
Once you’ve done your homework, finding the right home comes with its own pitfalls and one of those can sneak up on unsuspecting homebuyers -- a real estate agent.
“Unless you’ve specifically hired a buyer’s broker to represent you, by contract, they are the agent of the seller, beholden to work in the seller’s best interest and secure them the highest possible price for their property. They are legally and ethically bound to the seller,” says Gumbinger. “This doesn’t quite mean that they won’t work with or even for you, but in general, you are on your own in this regard, and it should be noted that there are a lot of people whose livelihoods depend upon your deal going through.”
6. Showing Your Hand to the Seller
Some mistakes can cost you serious money and this is one of them. You’ve found the house you want to buy. Good! But getting the best price at negotiations means that you need to be tight-lipped about how much you love the home, otherwise the seller has more leverage to get you to pay your maximum.
“Even when a homebuyer is convinced this is the home for them, communicate to your agent, spouse and friends but not to the seller or their representative,” Bridges says. “You want to leave yourself as much room for negotiations as possible.”
7. Thinking You Can Read a Contract by Yourself
Mortgage agreements are not child’s play. The paperwork involved in homeownership can be complex and riddled with jargon that the Average Joe just might not understand, but this is an easy mistake to avoid making.
Several of our experts recommended hiring a real estate attorney to review all of the paperwork before you sign anything.
“There can be any number of contingencies in a realty sales contract which may be reviewed/modified/excised… but the time to do that is before execution, not after,” Gumbinger says. “Ask questions and get answers, in writing if possible, and if they don’t understand the answer, keep asking until clarity is attained.”
8. Waiving a Home Inspection
One of our readers suggested this tip as it’s something she fell for -- and our experts agreed that this was a biggie. New homebuyers may be looking for small ways to cut costs on a big purchase by waiving the right to have their own inspector go in and review the home, says Erica Ramus, broker/owner of Ramus Realty Group in Pottsville, Penn.
“The $350-500 you put out now for a home inspection will seem like small potatoes if the home inspector finds a big problem you would regret later. Get a home inspection, or take your chances and don’t complain later if the house has unforeseen issues. Skipping this step is being penny wise but pound foolish.”
Ramus also advises buyers to avoid using a family friend or relative to do the inspection instead of using a certified home inspector. The extra cash you’ll spend is worth the fresh set of eyes.
9. Not Budgeting for Repairs and Maintenance
Many new homebuyers think they should try to get the most expensive home that they can afford, but there are other expenses that should be budgeted for -- like repairing the furnace or roof. Home ownership comes with a different set of expenses than just renting, and new buyers need to factor in things like higher monthly utility bills and the cost of upkeep on older homes.
“If a real estate agent tries to get you to go for a home on the top of your price range, don’t even think about it unless you know you can also safely set aside money in a savings account for expenses that will inevitably come up,” Detweiler says.
10. Taking Money Out of Your Retirement Savings to Help Pay for the Home
Draining your retirement fund to help buy a house just isn’t a smart decision. Not only will you lose out on the future benefits that the money can be doing for you in retirement, you’ll lose even more to Uncle Sam.
“Taking cash out of a retirement account to use for a home purchase is also a frequent mistake of first-time homebuyers,” says Brian Capossela of Cap Equity Realty. “If they do this, and then they end up not buying the home, they’re still stuck with the tax penalties.”
Delaying the purchase of the home or downgrading to a less expensive house are better options.
Kali Geldis is Credit.com's Deputy Managing Editor. Kali writes on a wide range of personal finance and credit topics. She previously ran MainStreet.com, the personal finance website powered by TheStreet. She has also worked for The Wall Street Journal as a Dow Jones Newspaper Fund intern and at The Huntington Herald-Dispatch as a reporter. Reach Kali at kali at credit.com.
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