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For most people, a car is their first big-ticket purchase. Apart from negotiating the price, and possibly taking out a simple loan, it is usually a straightforward transaction. Many dealerships have even gone to a “no haggle” pricing model where a buyer has to pay the posted sticker price without negotiations.
However, once first-time buyers reach the point of wanting to buy a home, the stakes are much higher. They are often unprepared for the myriad of critically important decisions that they must make to maximize the effectiveness of their purchase. Buyers need to educate themselves ahead of time to ensure a good outcome. Having to say, “I didn’t know that,” right before or after the transaction can spell disaster. Here are six key mistakes to avoid when buying your first property.
1. Not contacting a lender until after they’ve found the property of their dreams: Without contacting a lender in advance of shopping, buyers don’t know the range of loan programs available, the down payment requirements, the terms of varying loan programs, the payment of private mortgage insurance (or not) and the timing involved in acquiring a loan. To avoid this mistake, make contact with several lenders to learn more about the loan process, loan programs and your qualifications, including helping to fix any problems with credit score. Finally, get preapproved so that there is certainty about the price range you can afford.
2. Not working with a real estate agent: The real estate seas can be turbulent, and having a good agent on your side will help you make informed decisions. Interview real estate agents to find one who will be dedicated to your needs, and has the experience needed to win a negotiation if you’re in competition with other buyers. Hire an agent with whom you are comfortable. Some agents shy away from working with first-time buyers, but many of them enjoy the role of advisor/teacher to those who need guidance and support during the often-stressful process.
3. Being clueless about the amount of money needed to buy a property: Many first-time homebuyers forget that they need to pay closing costs, not just the down payment. Closing costs typically add 2-4% of the sales price to the total upfront cost of a purchase, as states and counties typically have expensive transfer and recordation taxes. Lenders and settlement companies also have a variety of fees associated with the loan approval and settlement process. More and more loan companies are unveiling new programs that require lower down payments. Ask about these programs, and make sure you are comfortable with the unique terms of each program. As needed, keep a close eye on changes in the interest rate after the initial rate expires.
4. Focusing only on the house and not the neighborhood during the search process: Keep in mind the old real estate adage, “location, location, location” when buying a property. What actually determines most of the value of your property is the neighborhood and block. Also try to buy one of the least expensive properties on the block rather than the most expensive. Having more expensive properties pulling up the value of your home is better than vice versa.
5. Not taking the home inspection seriously enough: Having a home inspection is one of the most important provisions in a contract. A buyer has the chance to identify defects with a property while the issues are still the responsibility of the seller. Paying for a top-flight home inspector allows you to identify problems so that you don’t inherit a raft of problems after moving in. If needed, consider conducting a pre-offer inspection so that you can write a cleaner offer without an inspection contingency.
6. Buying a house that’s too expensive: Many first-time buyers fall in love with a property and decide to buy — even if it’s a stretch financially. Sure, they might qualify for the mortgage, but if they then become house-poor from the mortgage payment, property taxes, home insurance and upkeep, it can lead to a serious decline in lifestyle. Yes, owning real estate has been a time-tested road to building wealth and enjoying the American Dream, but don’t stretch yourself too far!
Buying a first home is a momentous occasion. Coming to the process prepared can help new homebuyers avoid common pitfalls and find their dream home.