From getting approved for a mortgage to paying for unexpected repairs, the home-buying process can be a complex, borderline overwhelming process the first time. Given the increasingly competitive housing market, particularly for big metro areas, it’s critical to be adequately prepared ahead of time.
We asked financial experts who have gone through the home-buying process to share what they wish they knew before buying their first home, so that you can avoid making these common mistakes. Find out what you absolutely need to know before taking out a mortgage.
Visit Your Potential Home at All Times of Day Before You Buy
One thing an open house won’t show you is what the neighborhood’s like at night -- or early morning. That’s why it’s important to make time to visit the neighborhood during different times to try and get a grasp of where you’re considering calling home.
“When I bought my first property, I didn’t know the area too well,” said Pauline Paquin of ReachFinancialIndependence.com. “I visited on a sunny morning. The area looked green, and it was close to a train station. After buying, I found out the area got really shady at night. And the local teenagers enjoyed breaking mailboxes and elevators, resulting in unneeded HOA fees. When you’re shopping for a house, make sure you visit the neighborhood by day, by night and on weekends. And search the area online for anything out of the ordinary.”
Don't Be Afraid To Negotiate With the Seller
Some sale prices are locked in firm, and in today’s market, they’re often going for well above the asking price. However, that doesn’t mean buyers have no power to negotiate.
“My wife and I forgot to negotiate with the seller for the small things when we bought our first home,” said Hank Coleman, publisher of Money Q&A and co-host of the MilMoney Movement podcast. “Looking back, I wish we had asked the seller to include things like window blinds and a garage door opener. We bought a new construction home from a builder that had some upgrades and concessions added to the negotiations, but we definitely forgot to add some of the small things to the deal as well.”
Get Your Finances in Order Before Applying For a Mortgage
Applying for a mortgage is no small feat, and it’s crucial that you have all of your finances in order before taking that step, as Jenny Foss of JobJenny learned.
Foss bought a home with a five-year adjustable-rate mortgage, expecting to move out before that was up. However, she ended up wanting to stay at the end of the five years and got stuck with high rates because she didn’t take the time to clean up her finances before taking out a new mortgage.
“I had been an entrepreneur for just over a year, and wasn’t ready to sell,” Foss said. “This is when I realized my tactical error. It’s not easy to score good mortgage rates — even with excellent credit — when you’re a fledgling entrepreneur. The interest rate on my new mortgage wasn’t pretty, at all. Big lesson learned: If you’re planning to strike out on your own, consider squaring up your loans or mortgage before you take the leap.”
Make Sure You Understand What Private Mortgage Insurance Is Before Agreeing To Pay It
Buying a house is an incredibly involved process, and it can be easy to get overwhelmed by the stress of it all. However, it’s important you get a firm grasp of every aspect of the process. And that includes private mortgage insurance.
“A mistake I made with my first home was not truly understanding how private mortgage insurance worked,” said Amy White, founder of the blog Daily Successful Living. “I assumed that as my home gained value, my bank would automatically remove the PMI when the value went up enough percentage-wise. It wasn’t until I asked questions that I realized that I would need a full appraisal done before I could get my PMI removed. My error ended up costing me almost $1,000 between the extra interest and the appraisal.”
Only 27% of respondents could accurately describe what private mortgage insurance is in a homebuying survey of over 1,000 Americans conducted by GOBankingRates and NBKC Bank. In reality, it’s something you’ll likely have to pay if you put down less than 20% on a conventional loan, which is most common with first-time homebuyers.
“The one advantage of PMI is that your interest rate may be slightly lower than a loan without PMI,” said former army officer and loan officer at NBKC Bank, Jim Schneider. “However, the cost of that PMI will typically be far more than any savings related to the lower rate.”
Don't Buy a House That Will Be a Constant Project
That old saying about ‘if something seems too good to be true, it probably is’ comes up a lot when looking at different homes. Which most often means properties that seem like a good deal are actually money pits that’ll keep your time -- and your finances -- tied up for the foreseeable future.
“My ex-husband and I enthusiastically bought our first and only weekend house on a lake in northwestern Connecticut: a 1980s split-level that needed a whole lot of work. The exterior, interior and the garden all needed updating and TLC,” said J. Kelly Hoey, author of “Build Your Dream Network.”
“While we initially jumped into the project with gusto, it soon got tiring to always have a lengthy to-do list of house improvement projects. We ended up having to spend almost every weekend in a Lowe’s or Home Depot — rather than enjoying the lake, the initial reason we were attracted to the property.”
Even If You Currently Don't Have Kids, Consider If Your House Would Be a Good Family Home
A home is a long-term investment. So, it’s important to consider if it’ll fit your lifestyle now, but also if it’s the kind of place you could grow into.
“I looked at my home as a ‘double-income, no kids,’ and not as a possible parent. While I thought about the school district, I didn’t think about buying a home with a backyard, which I now regret,” said Kara Stevens of The Frugal Feminista.
“I can’t let my daughter play outside unless we’re at the park or my mom’s house. It’s not an earth-shattering mistake, but it’s something I’d do differently if I could.”
Don't Put All of Your Money Into the Down Payment
Whatever your situation, a down payment is likely the costliest aspect of the whole home-buying process. But that doesn’t mean you should empty out your accounts for it, as there are always -- always -- going to be unforeseen expenses.
“I had no idea when I bought my first house that when people say stuff will go wrong, they weren’t kidding. Within one month of living in our new house the plumbing ruptured all the way out to the curb and had to be replaced right away. When the plumber gave me the estimate of $20,000, I almost fainted, as we had just put all our money into buying the house,” said Shannah Compton Game, host of the podcast Millennial Money. “It had to be done, and the final bill was closer to $25,000 — proof that you should always have a super healthy emergency fund after you buy your house as well. Don’t put all your money into the down payment.”
If putting down 20% for a conventional loan would wipe out your emergency fund, consider other loan options that allow you to put down less — or nothing at all in some cases.
“The No. 1 misconception when buying a home is that you have to put 20 percent down,” said military spouse and loan officer at NBKC Bank Amy Stuhr Paterson. “You potentially can put as little as no money down with a VA loan for those with a military background and buying within the VA maximum county limits. FHA (loans), if (a person is) buying within their county limits, allows as little as 3.5% down, and conventional financing allows for as little as 5% down.”
Don't Skip the Final Walk-Through
Another aspect of home buying that’s easy to get lost in the shuffle is the final walk-through. That happened to Amy Blacklock of Life Zemplified, and it didn’t go too well.
“I’d arrived at the home to do the walk-through, but my agent was running late and I could not get into the house. In order to not miss the closing, I opted to skip the walk-through since the home had been sitting empty, and everything was fine during the home inspection and mortgage appraisal. After the closing, I walked into my new home to find water damage to the wood floor in front of the kitchen sink due to a leaking pipe. Approximately 60 square feet of wood needed to be replaced — at my expense. I’ll never skip a walk-through again.”
Budget For Unexpected Costs
As mentioned earlier, surprise costs are a given when buying a house, and it’s important to budget for them.
“I think one of the biggest areas of concern for me buying my first house was forgetting all of the ‘extras’ that come with buying a home, such as lawn furniture, yard tools, a ladder and all the furniture for the house,” said Vicki Cook, co-founder of Women Who Money. “I should have budgeted more for that. Also, a roof might need replacing in a few years, and five years later, your washer and dryer might die too. So many people ‘miss’ this part of buying a house.”
Understand How Debt-to-Income Ratio Is Calculated
“We had saved up about $5,000 to put down on our home. We didn’t realize that the bank wasn’t going to take into account the down payment money we had saved when factoring in our debt-to-income ratio, which meant that they required us to get a ‘gift’ from someone else in the amount of our down payment,” said financial coach Jessi Fearon. “My husband and I have never had to borrow money from our parents, so it was a strange thing to have to ask my in-laws to borrow money we already had saved. Of course, we paid them back as soon as we closed on the house, but it was a process that we were totally unprepared for, and it created some awkward situations for my husband and me.”
Make sure you understand how debt-to-income ratio is calculated before you apply for a loan, because it could determine whether or not you get approved.
“Underwriters take into consideration the debt-to-income ratio –minimum monthly liabilities, including the new mortgage payment and applicable HOA dues, divided by the borrowers’ gross income — and assets to confirm the borrowers’ ability to qualify for a loan,” said Stuhr Paterson.
See a Home When It's Furnished Before Buying
There’s a reason that houses on the market are staged: It’s crucial to see what a place looks like with furniture.
“I bought a condo when I was just starting out. I knew it was on the smaller side, but I had no idea how tiny it really was until I moved in,” said Greta Brinkley of the blog Greta’s Day. “Places sure do look a lot larger when they’re empty.”
Shop Around for Vendors
Real estate agents are typically a necessity when house hunting, but that doesn’t mean you’re stuck with the first one that crosses your path.
“I was nervous the first time I bought a home, and accepted a lot of what my real estate agent, who was and is a personal friend, recommended. She took very good care of us and I suspect we did get pretty good deals on everything, but I wish I would’ve known which professionals we could’ve shopped around for, and which we couldn’t,” said Jim Wang of WalletHacks.com. “We used everyone she recommended, and never considered other options for a title company, home inspection, etc. In the end, our home was good anyway and we have no regrets, but I wouldn’t buy anything major these days without getting at least three quotes from different vendors.”
Check Your Credit Before Applying For a Mortgage
Like getting your finances in line before applying for a mortgage, you’ll want to check your credit score as well. And do what you can to bring the number up if necessary.
“My biggest mistake was not checking my credit ahead of time,” said Miranda Marquit of PlantingMoneySeeds.com. “We had two double-reported student loans on the report, so it looked like our debt-to-income ratio was much higher than it actually was. Because we didn’t know about it, we couldn’t get it fixed before applying for the mortgage. Our pre-approval and the process as a whole was delayed because we had to go through additional underwriting hoops.”
Granted, your credit score isn’t the only thing that will be taken into consideration, meaning that even if you have excellent credit you might not be approved.
“While your credit score is important because it shows your history and willingness to pay your financial obligations, this does not show your ability or capacity to repay the loan,” said Schneider. “While you might have a great credit score, you could still not be approved for a mortgage if your debt ratio is too high.”
Budgeting Guide: How To Create a Budget You Can Live With
Keep Track of How Much You Spend on Upgrades
While unexpected costs are inevitable, it’s easy to let them get out of control. That’s why it’s important to track what you’re planning to spend ahead of time to keep overall costs in line with what you can afford.
“We once bought a house that we had built. We loved the idea that it was all new and we would get to pick everything. On top of all the upgrades that we knew about, we were totally unprepared for all the little extras like sod for the backyard, and blinds and curtains,” said Annick Lenoir-Peek of The Common Traveler. “When we listed our house, we realized that we had put in about $20,000 in the two years we lived in it.”
Take Water Issues Seriously
Nothing can be more complicated or costly than water issues. Things like septic, drainage or even landscaping can create huge problems, so make sure any are addressed before buying.
“We bought our first home in 2007 even though it had standing water in the backyard. We thought the water was no big deal, and even our real estate agent said we could put a drain in if we had to. Now that I know better, I know what a huge red flag water issues can be,” said Holly D. Johnson of the blog Club Thrifty.
“We still own that home as a rental property, and a few years ago we had to pay for a French drain and a new sump pump. The entire project was very expensive and something I would have avoided if I had known better. We have bought several homes since then — including primary homes and rental properties — and we take water issues a lot more seriously now. I would never buy a home that is prone to water problems or flooding again, no matter how good the deal was.”
Educate Yourself About Mortgage Terms
Again, staying on top of every different aspect that comes with buying a home can be difficult, but make sure you’re educated about mortgage terms.
“My biggest home-buying mistake was that I didn’t educate myself about the terms of my loan,” said financial coach and founder of the Hope+Cents blog Alaya Linton. “I had a first and second mortgage, and the second was an adjustable-rate, interest-only HELOC — I didn’t understand what any of that meant. Had I taken the time to learn and educate myself about my mortgage, I would have come to the conclusion that I couldn’t afford it. The banks will always lend you more than you can manage, so do your due diligence to understand your loan terms, and determine for yourself if the mortgage is affordable.”
Linton isn’t alone — the GOBankingRates and NBKC homebuying survey of over 1,000 Americans found that most people could not identify incorrect statements about a mortgage, which seems to indicate that most people don’t fully understand how mortgages work. Only 1.5% of respondents knew that the all of following statements are inaccurate: All mortgages require that you provide a down payment; all mortgage applications require pay stubs/tax returns, and you must be preapproved and prequalified to get a mortgage.
Think Twice Before Purchasing a Home Without an In-Unit Washer/Dryer
Whether or not appliances come included with a home varies from sale to sale, but it’s worth considering getting some affordability in exchange for the constant inconvenience.
“When I bought my first home, a condo, I was one of just two units on the main floor, and there was no laundry on my floor,” said Eric Rosenberg of PersonalProfitability.com. “I asked about adding laundry to my unit and found out it was doable but would be a challenge. I never ended up adding laundry and always had to schlep up the stairs. It was a big hassle I never got over.”
Don't Skip Mortgage Preapproval
The last thing you might want to do is add a step to home-buying, but a preapproval on a mortgage can be incredibly beneficial.
“Before looking at properties with your real estate agent, it’s a good idea to get preapproved for a mortgage,” said personal finance expert Sean Cooper. “A mortgage preapproval tells you how much you can afford to spend on a home. Without it, you could offer $600,000 on a condo, only to find out that your lender will only approve you to spend up to $550,000 — uh-oh.”
Not only will getting preapproval give you a better sense of what you can afford, but it will also make you a more attractive buyer.
“It makes your offer more attractive to a seller because you have proof that a lender has completed some preliminary work that confirms you will be able to complete the loan process,” said Schneider.
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Make Sure Agreed-Upon Repairs Are Done Before Closing
Just like the final walk-through, any repairs that the seller agreed to do before handing over the keys need to be checked to see that they were actually done. Otherwise, you’ll be dealing with even more unexpected costs.
“Be sure to communicate to the seller’s agent what items must be fixed, and confirm repairs are made before closing escrow,” said Paul Vachon of The Frugal Toad. “During my last home purchase, I provided the seller’s agent a list of items from the final walk-through that needed to be repaired. There were several broken roof tiles that were supposed to (be) replaced. However, I failed to visually inspect the roof before closing escrow, and ultimately had to pay for the repair out of my own funds.”
Don't Put Your Spouse on the Deed
Finally, if you’re able to secure a mortgage without a spouse, the best idea is to keep them off the deed, according to Cary Carbonaro, MBA, CFP. “If the marriage goes south like mine did, then you can’t sell the house, rent the house or refinance the house during the entire divorce.”
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Christian Long contributed to the reporting of this article.