How to Avoid The 4 Biggest Mistakes First-time Home Buyers Make
Import costs, consumer confidence, mortgage rates
by Sharleen Yuan
Interacting with many buyers on the market, I came to realize how easy it is for first-time home buyers to make mistakes in their biggest financial decision in life. All first-time home buyers wonder where to start, and they typically start with Zillow/Trulia/Google. As a real estate agent, I use the internet for informational purposes, but never for decision making. Here are the five typical mistakes buyers should avoid, especially the first-time home buyers.
Mistake 1: Shopping For Homes Before Shopping For Mortgages
Most first-time home buyers are typically renters. If you are living in the NYC area, it is likely that you will not be able to afford purchasing the unit you are currently renting. When buying a home, your affordability depends on your debt to income ratio, credit score, source of income etc. Your mortgage lender will have a better idea about your purchasing power based on these metrics. These are the most deadly mistakes that home buyers can make:
Attending too many Open Houses in a span of months, even years;
Waiting for the “unicorn”;
Prices going up and becoming priced out;
To avoid that, first speak with the lender about how much you can borrow and what your monthly mortgage payment looks like, BEFORE visiting homes.
Besides how much you can borrow from the bank, you’ll also need to factor in additional costs of being a homeowner. Unlike when renting, you’ll need to cover property taxes, homeowner's insurance, repairs, maintenance, and utilities. If your down payment is less than 20%, you’ll incur Mortgage Insurance Premiums (MIP) too. These all add both monthly and annual costs to your bill.
Remember: Know your monthly payment bottom line before shopping for houses. You may need to cure your credit, or save more for your down payment. Your borrowing power may be more/less than you think.
Mistake 2: Not Planning to Live In the Home Long Enough
The reason why home ownership helps people build wealth is because of home price appreciation. Additionally, your monthly payment is not going to your landlord anymore. Instead, part of your monthly payment goes into building home equity, or in other words, the ownership of the home.
Housing markets ride the wave of the economy. Though the economist's consensus is that the 2008 financial crisis leading to the housing crash will not repeat in the next recession, living in your home for at least 5-10 years will help you secure positive home appreciation.
Remember: There are costs associated with selling your home - taxes and broker fees. You do not want to sell your home too quickly in case your home price appreciation cannot catch up with these costs.
Mistake 3: Not Leveraging Free Resources
What are the free resources? Real estate agents, mortgage brokers, and insurance brokers. Unfortunately, these are the three types of people that first-time home buyers are most afraid of. Most home buyers think their services come at a cost borne by the buyers. In addition, home buyers do not think they add much value, especially nowadays that buyers have Zillow and Trulia at their fingertips. But that is simply not true.
Also read, Is Zillow Accurate...
Real estate agents working for buyers are not paid by the buyers. Their commission is paid by the seller with a rate that is agreed upon at the time when they put their homes onto the market. The value that real estate agents add is their knowledge of the specific local areas they are familiar with - inventory, transportation, transaction process, fair price, contract negotiation, and tax/transaction histories. A simple Buyer's Consultation will sift out houses so you don’t waste time and help give you a better idea of what kind of market you are in. Homes that are in good condition and priced right will be sold to buyers working with agents who submit a competitive offer right after they hit the market, not buyers checking out Zillow who later find out their ideal home is sold already.
Be careful of buying homes at an Open House because you may lose the insight into the true value of the home by working with the listing agent who represents the seller, not you.
Mortgage brokers come in handy when you are shopping for the best mortgage rate. When working with a Bank, that loan officer only has access to their own mortgage programs and mortgage rates. When working with a mortgage broker, they have access to hundreds of different lenders and mortgage products. If you have imperfect credit then using a broker over a direct lender will be to your advantage because there are more programs that you may qualify for. Brokers are typically more knowledgeable too. Read more information about brokers vs. lenders.
Insurance brokers operate similarly to mortgage brokers. They have access to many homeowner's insurance policies from various insurance companies. They can also look into bundling homeowner's insurance and auto insurance to save you money, or they can give you a quote on life insurance and umbrella policies once you have already built a certain level of wealth.
Remember: Your time is the most valuable asset. With little to no cost, you save time and are empowered with more knowledge to make wiser decisions.
Mistake 4: Being Too Picky or Not Picky Enough
I always believe in the efficiency of the housing market. For buyers that want modern features and brand-new construction, be ready to pay the price or accept a longer commute. Otherwise, buy the outdated house in the best neighborhood that suits you, set aside some renovation costs to replace the flooring, the kitchen, and the bathroom. Believe it or not, renovation is not as terrible as many have imagined. If you just want to update specific areas in the house, ask contractors to come to give you bids. If you want to completely redesign the home, hire a designer that works with contractors to do all the work for you. You will be surprised that an updated kitchen, bathroom, and flooring may cost under 100k.
Speaking of not being picky enough, many first-home buyers who are former NYC renters are amazed at how much more space you can have in NJ suburban areas. But do not be satisfied with the first home you visit. Ask your real estate agent about the area, price range, house age, average monthly costs etc.
Remember: There is no perfect home, but there are always homes with potential. As long as the house meets your commute/school/location requirements and sits within your budget and renovation tolerance level, you should take action instead of waiting. Because if you do not act, other buyers will.