First-time homebuyers are very important participants in the housing market and overall U.S. economy. Over the past two decades, according to data from the Federal Housing Finance Agency, first-time homebuyers have on average represented 21% of mortgage originations.
Because refinancing transactions are a large portion of mortgage activity and by definition will exclude first-time homebuyers, the data in the above chart understates the participation of this group. In actuality, when you look at mortgage originations for home purchases (so excluding refinancing), first-time homebuyers have on average represented 48% of purchases over the last 20 years. Clearly, first-time homebuyers are important players in the housing market, mortgage industry and economy at large. At the same time, they are also among the most vulnerable participants when it comes to home buying simply because they are more likely to be inexperienced about many aspects. This is especially problematic given the fact that a home is likely to be the most significant investment a person makes in their lifetimes. In the below we’ve detailed 13 first-time homebuyer mistakes that can be expensive but are easily avoidable.
13 First-Time Homebuyer Mistakes
Waiting For Mortgage Rates to Go Down
This is a common first-time homebuyer mistake that is especially relevant in today’s environment. No one wants to feel like they’re over paying and therefore it is tempting to look at mortgage rates in 2020 and 2021 and feel uneasy about moving forward with a home purchase at today’s rates. This is however a mistake for two reasons. First, it is important to evaluate mortgage rates over the very long-term and certainly not over just a couple of years. As shown below, when current mortgage rates are viewed over a period of decades, rates are still attractive compared to history.
Second, buying a home is a long-term investment. Based on research from the National Association of Realtors, on average homeowners stay in their homes for 13 years. Therefore, while it can be frustrating to be getting quoted mortgage rates 2.00% higher than they were 6 months ago, this doesn’t mean that buying a home is suddenly a bad investment. Waiting for mortgage rates to down and delaying a home purchase as a result is a very common first-time homebuyer mistake than can and should be avoided!
Shopping for Homes First and Budgeting Second
Buying your first home is very exciting and the actual process of looking at potential homes online and attending viewings are among the especially fun parts of the homebuying process. However, the sequencing of activities is important. A common first-time homebuyer mistake is to jump right into shopping for homes and signing up to view a lot of homes that seem attractive. It is a much better approach to first decide a number of things:
- What type of home are you most interested in buying?
- What is the ideal size, both in terms of indoor and outdoor space?
- How many bedrooms and bathrooms would you ideally want?
- What are your “must have” amenities?
- What is the maximum amount you are able to spend?
It’s also important to sketch out what you’re looking for in a neighborhood. There are lots of tools like Niche.com which can help you research characteristics about a neighborhood such as the quality of the schools in the area. Having a very thorough list of these factors before you start shopping for your first home is an effective way to avoid this first-time homebuyer mistake.
Not Doing Thorough Financing Research
There are a lot of different programs available to first-time homebuyers from purely informative and educational programs to programs that help first-time homebuyers finance their purchase. In addition to this, there are specific mortgages available to select groups to help facilitate homeownership such as VA, USDA and FHA loan programs. The list of available assistance programs is quite extensive, but we’ve touched on several of the large ones which we think every first-time homebuyer should at least be aware of:
- Down Payment Assistance Programs – we’ve written about this previously. These programs are offered by state or local housing finance agencies and non-profits to help potential homeowners pay for their down payments. For example, as of this writing first-time homebuyers in the state of New Jersey can get up to $10,000 for use as a down payment and for their closing costs.
- State Government First-Time Homebuyer Programs – these programs offer various incentives. For example, in California there are CalHFA and CalPLUS Conventional Programs, while in Michigan there’s the MI Home Loan Flex program.
- FHA Loans – these loans are insured by the Federal Housing Administration and can allow potential homeowners to pay as little as 3.5% for their down payment.
- VA Loans – a feature of the VA home loan benefit which is offered by the Department of Veteran Affairs, is that some eligible borrowers can avoid having to make any down payment on their home purchase.
- USDA Loans – similar to VA Loans, potential homeowners can receive 100% financing from USDA-approved lenders when purchasing their home. This means no down payment.
- Lender First-Time Homebuyer Programs – we’d recommend asking every lender you speak with during your mortgage loan search as a large number of lenders have programs specifically for first-time homebuyers. For example:
- BECU – the credit union (which is open to everyone as previously discussed) currently is offering first-time homebuyers a grant which can be up to $7,500 towards down payment or closing costs.
- Ephrata National Bank – the bank currently offers the Greatstart Homeloan which for qualified borrowers requires no private mortgage insurance and down payments that can be as little as 3% of the purchase price.
It is certainly worth dedicating ample time to thoroughly research your financial options as there are many programs available which can save you thousands of dollars.
Not Being Proactive About Your Credit
This is one of the most important first-time homebuyer mistakes. Many homebuyers don’t actively monitor their credit scores and credit histories and simply just apply for credit and hope for the best. It is very important to get copies of your credit reports at least several months before you plan to start the home buying process. Doing this will allow you to address any issues before you start the mortgage application processes. The credit requirements for getting approved for a mortgage are more stringent than other forms of credit because of the sheer size of a mortgage loan which in the United States is $300,000 on average. As we noted in our article on the credit bureaus and have shown again below, 84% of mortgages that were approved in the United States in 2021 were to people that had a credit score of 720 of better.
Being proactive about addressing issues with your credit is important for increasing your chances of getting approved for a mortgage, and is also important for ensuring that you get the best possible terms from your lender.
Not accounting for Property Tax in your budget
Property Taxes are sometimes a new concept to first-time homebuyers given that they’re likely to have been renting an apartment or a home. Depending on where you live, property taxes can be a significant monthly expenditure and should not be overlooked. For example, in New York State, the average property tax is 3% of the home’s value. So for example, if you bought a home for $400,000 and made a 20% down payment and were approved for a 30-year mortgage with a 5% interest rate, your monthly payment for the mortgage would be $1,718. However, if the home was also located in New York State, you could owe property taxes of $1,000 a month based on the 3% property tax rate and the $400,000 home value. In this example, property taxes are almost as significant as the actual cost of the mortgage!
Not Doing a Thorough Home Inspection (or skipping it entirely)
This might seem like a surprising first-time homebuyer mistake but it actually happens more often than you’d think. A survey by Porch found that 88% of homebuyers conducted a home inspection as part of the home buying process. That leaves 12% of people that opted against it. In fact, more recently in 2021 research from the National Association of Realtors found that between 20 and 25% of homebuyers waived home inspection contract contingencies! A home is a significant and long-term financial investment, and so it only makes sense to do as much due diligence as possible before committing to it as it increases your chances of discovering serious issues with the home before its too late.
Avoiding Neighborhood Research
While the vast majority of the effort and time in homebuying is dedicated to finding the home itself, it is a mistake to not focus at least a few hours studying the surrounding neighborhood. If it is at all possible we’d recommend that homebuyers spend a night at a hotel or Airbnb in the neighborhood of the home they’re considering buying. The more you can simulate what it would be like living in the home the better. Either way, getting a sense of the neighborhood you’d be committing to live in for several years is a step that shouldn’t be skipped.
Not using a Local Realtor
Your realtor plays an important role in homebuying and its not just taking you to see the various homes you’re interested in. Experienced local realtors will have a wealth of information about the homes, streets and neighborhoods and most importantly will have appropriate context to help you figure out whether the advertised price for a home makes sense or not. The advantage of using a local realtor is that they will be equipped with all of this knowledge since buying and selling homes in the area is what they do everyday. It therefore would only be to your disadvantage to work with a realtor that isn’t local.
Be Proactive with Appraisals
When a lender issues a mortgage loan they are issuing it against the home. Therefore, they need to conduct their own assessment of the value of the home before approving the mortgage. For example, let us say you have agreed to buy a home for $400,000 and are looking for a $320,000 mortgage loan after making your 20% down payment. The bank will conduct an appraisal and if they conclude that the home is actually worth $300,000, then they would not agree to provide you with a $320,000 mortgage loan. Overlooking the impact of appraisals is a very common first-time homebuyer mistake mainly because of experience. The way to avoid this is to look at what other homes in the area that have similar characteristics to your home (number of bedrooms, bathrooms, square footage etc.) have sold for to get an idea of how the appraiser might come to a value for your home. You can also hire an appraiser to get a more specific answer.
Hiring a Cheap Real Estate Lawyer
Most of time in life you get what you pay for, and our view is that this is more often than not the case when it comes to professional services, including lawyers. The home buying process is lengthy and expensive, and so it is tempting to want to save costs where possible. Hiring a cheap real estate lawyer is a common first-time homebuyer mistake, and is predicated on the view that the role of lawyers in the homebuying process is purely procedural. In fact, real estate lawyers are responsible for drafting the purchase contract which is anything but a procedural step. The contract is extremely important as it details important terms and conditions of the sale. A good real estate lawyer will ensure that their client (the home buyer) is protected. The point is, you need to have a thorough, experienced lawyer to ensure that the purchase contract is air tight and that you don’t end up discovering things about the home when it is too late.
Impulse and Emotional Purchases
This first-time homebuyer mistake is especially prevalent in the current environment. There have been so many stories and data points about bidding wars for homes in the United States (two examples are here and here) and a consequence of this is many frustrated home buyers. Losing out to bidding wars tends to create a dynamic where home buyers want to be more aggressive the next time they find a home they like. Similarly, walking into a home and falling in love with the property can also lead home buyers to immediately want to make offers and take ownership. The best way to avoid making an emotional or impulse decision is to have a well defined set of criteria before you start your home search, including a budget, and sticking to it.
Not Knowing Your Rights
One of the unfortunate realities of the home buying process is the continued existence of discriminatory practices. This can manifest itself in a number of ways including realtors omitting certain properties from the houses they present to you. The Fair Housing Act is a law that prohibits “any kind of discrimination due to a person’s race or color, national origin, religion, sex, family status or disability.” Know your rights as a prospective home buyer before you start the home buying process.
Not Opting for an Interest Rate Lock
As previously discussed, mortgage rates change almost every day and over periods of weeks and months, the changes can add up. The home buying process can take several months from start to finish which presents a problem for home buyers. If your budget assumed a 3.5% mortgage rate but by the time you’re ready to close, mortgage rates have increased to 4.5%, what happens? The way to avoid this is to take advantage of an interest rate lock which is offered by many mortgage lenders. The way it works is that as part of your mortgage application, once the lender has approved a certain rate for your mortgage you can opt to lock this interest rate for a period of time. Usually you want to choose a time period that covers you through the closing of the real estate transaction. If you opt against an interest rate lock, then you face the possibility of mortgage interest rates increasing before you close resulting in much higher mortgage costs.