Five First-Time Home Buying Mistakes to Avoid

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Thinking about buying your first home? Before you can unlock the door to homeownership, you have to take some important first steps including:

Getting approved for a mortgage.
Choosing the right real estate agent.
Finding the right home that fits your budget.
Here are five common mistakes first-time homebuyers should avoid.

1. More to it than mortgage payments

Many first-time homebuyers decide to buy when they feel ready for a mortgage. But just because they can afford the mortgage payments doesn’t mean they can afford to own a home, says New York attorney Rafael Castellanos, president of Expert Title Insurance.

“They have an idea of what their mortgage payment is going to be, but they don’t realize there’s much more to it,” he says.

Property insurance, taxes, homeowners association dues, maintenance, and higher electric and water bills are some of the costs that first-time homebuyers tend to overlook when shopping for a place.

“Keep in mind property taxes and insurance have a tendency of going up every year,” Castellanos says. “Even if you can afford it now, ask yourself if you’ll be able to afford the increased costs later.”

2. Looking for a home first and a loan later

Homebuying doesn’t begin with home searching. It begins with a mortgage prequalification — unless you’re lucky to have enough money to pay cash for your first house.

Often, first-time homebuyers “are afraid to get prequalified,” says Steve Anderson, a broker and owner at Re/Max Benchmark Realty in Las Vegas. They fear the lender may tell them they don’t qualify for a mortgage or they qualify for a loan smaller than expected. “So they pick a price range out of the sky and say, ‘Let’s go look for a house,’” Anderson says.

And that’s not how it should be done. Yes, it’s more fun to go look at houses than to sit in a lender’s office where you have to expose your financial situation. But that’s a backward approach, says Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois.

“You get preapproved, and then you find a home,” he says. “That way, you’ll make a financial decision versus an emotional decision.”

3. Not getting professional help

New to the homebuying game? You’ll need a reputable real estate agent, a good loan officer or broker, and perhaps a lawyer.

Venturing into this process alone, without professional help, is not a good idea. While every rule has its exception, generally, first-time homebuyers should not try to deal directly with the listing agent, Anderson says.

“If you are getting divorced, are you going to go to your husband’s attorney for help? Of course not,” he says. “Same here. If you go to a listing agent, they are only going to show you their listings. You must find a buyer’s agent to help you.”

If you hire an agent without a referral from friends or family, ask the agent to provide references from previous buyers. The same goes for loan officers or mortgage brokers.

“It’s very hard for first-time homebuyers because they don’t know who they are dealing with,” Anderson says.

It’s crucial to find a professional who will give you “truly independent advice,” Conarchy says. Sometimes that means hiring a lawyer.

4. Using up savings on the down payment

Spending all or most of their savings on the down payment and closing costs is one of the biggest mistakes first-time homebuyers make, Conarchy says.

“Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” he says.

Homebuyers who put 20 percent or more down don’t have to pay for mortgage insurance when getting a conventional mortgage. That’s usually translated into substantial savings on the monthly mortgage payment. But it’s not worth the risk of living on the edge, Conarchy says.

“I’d take paying for mortgage insurance any day over not having money for rainy days,” he says. “Everyone — especially homeowners — needs to have a rainy-day fund.”

Need a mortgage but don’t have much of a down payment? Search today for a low-down-payment mortgage.

5. Getting new loans before the deal is closed

You have prequalified for a loan. You’ve found the house you want. The contract is signed and the closing is in 30 days. Don’t celebrate by financing another big purchase.

Lenders pull credit reports before the closing to make sure the borrower’s financial situation has not changed since the loan was approved. Any new loans on your credit report can jeopardize the closing.

Buyers, especially first-timers, often learn this lesson the hard way.

“They sign the contract and they want to go buy new furniture for the house or a new car,” Anderson says. “I remember one case where, just before closing, the buyer drove to the office and said, ‘Look at my brand-new car.’ I told them, ‘You’d better go back to that dealership.’”

Luckily, the dealership agreed to wait a couple of days to report the loan to the credit bureaus, he says. Otherwise, it could have killed the deal.

~Polyana da Costa, Bankrate

What First-Time Home Buyers Need To Know

My team and I regularly come in contact with first-time homebuyers looking for some guidance. The prospect of buying your first home can be an anxiety-inducing one, especially if you don’t know where to start. I’ve spent my career helping thousands of people find the perfect home, so I’m happy to shed some light on the subject for those new to the process.

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Patience is key.

Even after you spend hours searching through listings and going to showings, your journey is far from over. Getting a mortgage, having the home inspected and going through the closing process all take time. General wisdom suggests that the process could last from 30-90 days, but that depends on a lot of extenuating factors.

The neighborhood you choose is important.

We believe the neighborhood you live in is just as important as the home you live in. When you make a purchase based solely on the number of bedrooms and bathrooms or square footage, you’re missing out on the lifestyle component of your new home. Where you live will determine not only obvious factors like where your children go to school and how much you pay in taxes, but it also determines more nuanced factors, like how you spend your weekends. Spend time in an area before deciding to buy there, and see if you can really imagine yourself living there on a day-to-day basis.

Have your documentation ready.

Keeping everything digitally organized — rather than trying to keep track of a stack of papers — will help immensely. Have pay stub statements, proof of assets and any loan or credit card debt documentation readily available. Expect to present more paperwork than you might think they need to see. Like a Boy Scout, the key here is to always be prepared!

Be flexible.

One sentiment that almost all of the homeowners we asked expressed is just that: the importance of being flexible. You may have a list of features that make up your perfect home but ultimately discover that you are unable to find all of those features within your budget. Know which “must-haves” you’re willing to compromise on and which ones you really need. If a short commute is most important to you, you may be willing to sacrifice an extra bathroom or granite countertops to be closer to work.

Follow guidelines.

In other words, don’t buy beyond your means. Deferring principal payments in order to get into a bigger home is often a risky proposition that can lead to financial strain. Work out a budget that’s realistic, and then stick to it. Not sure how much house you can actually afford? NerdWallet provides a calculator to help you determine that based on location.

Shop around.

Like any other major purchase, it’s important when buying a home to weigh your mortgage options. Different banks may offer different rates, so getting a wide range of offers can save you money. Planning ahead is your friend in this scenario — as soon as you think you may be interested in buying a home, start the mortgage process. This will also help you determine how much you can feasibly afford.

Don’t let fear stop you.

There’s no doubt that the home-buying process can be daunting — and for first-time buyers, the uncertainty can lead to dread. You will experience a range of emotions in the pursuit of finding your perfect home, but it will be worthwhile when you finally settle in.

At the end of the day, buying your first home will be an intensive process, but it doesn’t need to be a scary one. If you go in with a strong plan and know your facts, you’ll avoid making the wrong choice or missing out on a great deal.

~Bill Ness, Forbes Community Voice

Twenty-Five Tips for First-Time Home Buyers

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Buying a home can be nervewracking, especially if you’re a first-time home buyer. Not only is it probably the biggest purchase of your life, but the process is complicated and fraught with unfamiliar lingo and surprise expenses.

To make the first-time home buying journey a little less stressful, NerdWallet has compiled these 25 tips to help you navigate the process more smoothly and save money.

1. Start saving for a down payment early
It’s common to put 20% down, but many lenders now permit much less, and first-time home buyer programs allow as little as 3% down. But putting down less than 20% may mean higher costs and paying for private mortgage insurance, and even a small down payment can still be hefty. For example, a 5% down payment on a $200,000 home is $10,000. Play around with a down payment calculator to help you land on a goal amount. Some tips for saving for a down payment include setting aside tax refunds and work bonuses, setting up an automatic savings plan and using an app to track your progress.

2. Check your credit
When you’re taking out a mortgage loan, your credit will be one of the key factors in whether you’re approved, and it will help determine your interest rate and possibly the loan terms. So check your credit before you begin the home buying process. Dispute any errors that could be dragging down your credit score and look for opportunities to improve your credit, such as making a dent in any outstanding debts.

3. Pause any new credit activity
Any time you open a new credit account, whether to take out an auto loan or get a new credit card, the lender runs a hard inquiry, which can temporarily ding your credit score. If you’re applying for a mortgage soon, avoid opening new credit accounts to keep your score from dipping.

4. Determine how much home you can afford
Before you start looking for your dream home, you need to know what’s actually within your price range. Use a home affordability calculator to determine how much you can safely afford to spend.

5. Explore your down payment options
Struggling to come up with enough money for a down payment? First-time home buyer programs are plentiful, including federal mortgage programs with Fannie Mae and Freddie Mac that allow loans with only 3% down, plus Federal Housing Administration loans and Veterans Affairs loans. You could also try crowdfunding or asking if family members are willing to pitch in with a gift.

6. Research state and local assistance programs
In addition to federal programs, many states offer assistance programs for first-time home buyers with perks such as tax credits, low down payment loans and interest free loans up to a certain amount. Your county or municipality may also have first-time home buyer programs.

7. Budget for closing costs
In addition to saving for a down payment, you’ll need to budget for the money required to close your mortgage, which can be significant. Closing costs generally run between 2% and 5% of your loan amount. You can shop around and compare prices for certain closing expenses, such as homeowners insurance, home inspections and title searches. You can also defray costs by asking the seller to pay for a portion of your closing costs or negotiating your real estate agent’s commission.

8. Set aside more money for after move-in
Sorry, that’s not all you need to save up for before home shopping. Once you’ve saved for your down payment and budgeted for closing costs, you should also set aside a buffer to pay for what will go inside the house. This includes furnishings, appliances, rugs, updated fixtures, new paint and any other touches you’ll want to have when you move in.

9. Consider what type of property to buy
You may assume you’ll buy a single-family home, and that could be ideal if you want a large lot or a lot of room. But if you’re willing to sacrifice space for less maintenance and extra amenities, and you don’t mind paying a homeowners association fee, a condo or townhome could be a better fit.

10. Research mortgage options
Is a 30-year, fixed rate mortgage a given, or is another loan type right for you? If you can afford larger monthly payments, you can get a lower interest rate with a 20-year or 15-year fixed loan. Or you may prefer an adjustable-rate mortgage, which is riskier but guarantees a low interest rate for the first few years of your mortgage.

11. Compare mortgage rates
Many homebuyers get a rate quote from only one lender, but this often leaves money on the table. Comparing mortgage rates from at least three lenders can save you more than $3,500 over the first five years of your loan, according to the Consumer Financial Protection Bureau. Get at least three quotes and compare both rates and fees.

12. Decide if paying points makes sense
Lenders often allow you to buy discount points, which means prepaying interest upfront to secure a lower interest rate. There may also be an option for negative points, in which the lender pays some of your closing costs in exchange for a higher interest rate. How long you plan to stay in the house is one of the key factors in whether buying points makes sense. You’ll need to do some calculations or speak to a mortgage broker or loan officer to help you decide if buying points is worth it for you.

13. Get a preapproval letter
You can get prequalified, which simply gives you an estimate of how much a lender may be willing to lend based on your income and debts. But as you get closer to buying a home, it’s smart to get a preapproval, where the lender thoroughly examines your finances and confirms in writing how much it’s willing to lend you and at what terms. Having a preapproval letter in hand makes you look much more serious to a seller and can give you an upper hand over buyers who haven’t taken this step.

14. Hire the right buyers agent
You’ll be working closely with your real estate agent, so it’s essential that you find someone you get along with well. The right buyers agent should be highly skilled, motivated and knowledgeable about the area.

15. Stay under your preapproval limit
As your agent shows you homes, look for properties that cost a little less than the amount you were approved for. While you can technically afford that amount, it’s the ceiling — and it doesn’t account for a broken washer or dryer or any other expenses that arise during homeownership, especially right after you buy. Rather than maxing out that amount, set a lower purchase budget to leave yourself wiggle room for unexpected costs.

16. Pick the right neighborhood
Finding the right neighborhood is just as important as locating the right house. Research the schools, even if you don’t have kids, since that affects a home’s value. Look at local safety and crime statistics. How close are the nearest hospital, pharmacy, grocery store and other amenities you’ll use? Also, drive through the neighborhood on various days and at different times to check out traffic, noise and activity levels.

17. Make the most of an open house
Use this as another opportunity to scope out the neighborhood and your potential neighbors. During the open house, pay close attention to the home’s overall condition and look for any smells, stains or items in disrepair. Ask a lot of questions about the home, such as when it was built, when items were last replaced and how old key systems like the air conditioning and the heating are. If several other potential buyers are viewing the home at the same time as you, don’t hesitate to schedule a second or third visit to get a closer look and ask more questions.

18. Buy a home for tomorrow
It’s easy to look at properties that meet your current needs. But if you plan to start or expand your family, it may be preferable to buy a larger home you can grow into. Consider your future needs and wants and whether this home will suit them.

19. Let little things go
When you’re looking at a home, it’s easy to get caught up on superficial details like paint color, fixtures and carpets. These features are easy to change once the home is yours, so don’t let those little details get in the way.

20. Be prepared to compromise
It’s rare to find a house that’s perfect in every way, so think carefully about what you’re willing to compromise on and what you’re not. Perhaps no walk-in closet in the master bedroom is a deal breaker, but an outdated guest bathroom will be tolerable until you can renovate it.

21. Make a strong offer
Your real estate agent can help you with this, but consider how much under or over the asking price you’re willing to pay to obtain your dream home. If there are multiple bids, think about tactics to win over the seller, such as a personalized letter.

22. Avoid a bidding war that blows your budget
In a competitive real estate market with limited inventory, it’s likely you’ll bidding on houses that get multiple offers. When you find a home you love, it’s tempting to make a high-priced offer that’s sure to win. But don’t let your emotions take over; stick to your purchase budget to avoid getting stuck with a mortgage payment you can’t afford.

23. Negotiate
A lot can be up for negotiation in the homebuying process, which can result in major savings. Are there any major repairs you can get the seller to cover, either by fully handling them or by giving you a credit adjustment at closing? Is the seller willing to pay for any of the closing costs? If you’re in a buyers market, you may find the seller will bargain with you to get the house off the market.

24. Buy homeowners insurance
Before you close on your new house, your lender will require you to buy homeowners insurance. Shop around and compare rates to find the best price. Look closely at what’s covered in the policies; going with a less expensive policy usually means fewer protections and more out-of-pocket expenses if you file a claim. Be aware that your insurer can drop your property if it thinks the home’s condition isn’t up to snuff, so you may have to be prepared to find a new policy quickly if it sends someone out to look at the property and isn’t happy with what it finds. Also, flood damage isn’t covered by homeowners insurance, so if your new home is in a flood-prone area, you may want to buy separate flood insurance.

25. Know the limits of a home inspection
Once your offer is accepted, you’ll pay for a home inspection to examine the property’s condition inside and out. But not all inspections test for things like radon, mold or pests, so be sure you know what’s included. Make sure the inspector can access every part of the home, such as the roof and any crawl spaces. Attend the inspection and pay close attention. Don’t be afraid to ask your inspector to take a look — or a closer look — at something and ask questions. No inspector will answer the question, “Should I buy this house?”, so you’ll have to make this decision after reviewing the reports and seeing what the seller is willing to fix.

~Emily Starbuck Crone

How to Find a Starter Home in a Hot Housing Market

An overheated real estate market can be a tough time for buyers in search of a budget-friendly starter home. But that’s exactly the type of real estate market 2017 is ushering in.

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According to a recent report from the National Association of Realtors (NAR), the share of households that believe the economy is improving soared to 72% in the first quarter of 2017. “Forty-seven percent believe that strongly, up from 45% in Q4 2016 and 44% one year ago in Q1 2016,” NAR said.

When there’s increased competition for homes, prices generally go up. (Go here to see how much house you can afford.)

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A new report from Redfin bears this out, revealing home prices in February increased 7.2% from a year earlier. What’s more, homes priced for less than $240,000 witnessed the highest appreciation — skyrocketing 8.4% year over year in February and 100% since the market lagged in 2012.

Combined with a lack of housing stock — Redfin reports a 6.4% decline in new listings in February — and you have what might be a daunting buying experience for newcomers.

With that in mind, here are five tips from experts on how best to snag a starter home right now.

1. Work with a professional

This may seem like less-than-helpful advice, but it’s the first suggestion most experts offer when discussing the predicament faced by first-time home buyers.

“You want someone who knows the neighborhood,” said Jessica Lautz, managing director of survey research and communications for NAR. “It could be difficult if you go it alone.”

Seek out an agent who is knowledgeable about the areas in which you’d like to search so you can help avoid these first-time homebuyer mistakes.

2. Get pre-approved before starting a search

Before discussing the pre-approval issue, it’s important to sort out your finances and to do it before embarking upon a search.

This effort should include reviewing your credit score. If it’s less-than-stellar, you can reach out to lenders for tips regarding how best to improve it, said Boston-based Redfin real estate agent James Gulden. You can view two of your credit scores for free, with helpful updates every two weeks, on Credit.com.

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“Sometimes people see their credit score and don’t know where to go from there,” said Gulden. “All lenders have different thresholds for what they’re willing to take on in terms of a buyer’s credit score. And they will also look at your employment profile.”

When you’re ready, it’s wise to obtain pre-approval for a mortgage before wading into the market. Not only will it ensure you lose no time when you’re ready to make an offer, it will help clarify what you can realistically afford.

3. Be prepared to make compromises

Even seasoned, older buyers make compromises. Whether it’s the price, condition or amenities, compromising is part of the process.

“It’s more common for millennials to make compromises on first homes, but all buyers really do compromise on something,” said Lautz.

Translation: Figure out what you are willing to let go of or do without.

4. Be patient

Buying a home is a process, no matter how much money you have. So mentally prepare yourself for the process, including the ups and the downs. Preparing for the downs includes not getting too attached to any one house.

“It’s easy to lose a couple and say, ‘Forget this, we’ll keep renting,’” said Gulden. “A lot of people are losing out on the first five or six homes they submit an offer on before being successful. From a mental standpoint, it’s very easy to get connected to a place, and when you don’t win a place, it can be upsetting. But in this market, it’s important to be able to brush it off and realize there are other places that will be coming onto the market.”

5. Write a personal letter

Gulden admitted this tip is not exactly novel, but it can give you an edge in a particularly competitive market.

Writing a personal letter to the seller, enclosed with your offer, can help set you apart when there are 10, 15 or even 20 more offers. And those numbers are no exaggeration, said Gulden, who recently helped clients submit an offer for a Cambridge property with 24 bids.

“If you don’t include a letter or something to differentiate yourself from others, then it’s all just numbers and dates on paper for the seller,” said Gulden. “Introducing yourself and telling the buyer who you are, why you like the property makes a big difference.”

~Mia Taylor, USA Today