5 First-Time Home Buyer Mistakes to Avoid at All Costs
Since the United States emerged from the recession that began a decade ago, the real estate industry has remained affected by lagging sales in a benchmark category: sales to first-time buyers.
Many “experts” have weighed in on the causes for this, which range from Millennials’ desire to live in urban areas, student-loan debt, tougher financing standards, higher down payments, and more.
What seems to be a point of agreement, however, is the industry need for a return for first-time buyers to the home-buying market. But, amid all the speculation as to why first-time buyer sales are lagging, the aforementioned “experts” might be missing a key point.
The housing crisis at the heart of the Great Recession moved the goal posts for home buyers. New regulations, plus a new apprehension of real estate, might have made the home-buying waters murkier for first-time buyers. When you’ve never done something before, it can be difficult to recognize potential pitfalls.
With that in mind, here are five mistakes that first-time home buyers might try to avoid if they want to join the ranks of homeownership:
1. Assuming you can’t get a mortgage
After the recession, the minimum credit score required for a mortgage climbed. Lenders were cautious and with good reason. But during the overall economic recovery, the average credit scores of approved home buyers trickled downward. If you think you have to have a 750 FICO score to qualify for a mortgage, you’re wrong. How many would-be-first-time buyers are sitting on the sidelines because they incorrectly assume their credit is not strong enough to get a home loan?
2. Assuming you don’t have enough for a down payment
After the recession, lenders wanted borrowers to put more money down. In the wake of the foreclosure crisis, they wanted buyers to have more “skin in the game.” And while zero down payment loans are a thing of the past, there are plenty of lower down payment loan options out there. It’s wrong to assume you have to save up 20 percent of a home’s purchase price for a down payment. And there are also down-payment assistance programs out there.
3. Shopping outside of your comfort zone
The typical debt-to-income ratio for approved mortgages is about 33 percent. That is, your monthly long-term debt obligations cannot exceed 33 percent of your gross monthly income. When you seek out a lender’s pre-approval letter, it will exist within this parameter. But that doesn’t take into consideration other expenses. Just because, for example, you get pre-approved for a $200,000 home loan doesn’t mean that the accompanying payment will be comfortable to make each and every month. If you want to be what’s known as “house poor,” shopping for a home at the top end of your pre-approval guidance is a good way to do it.
4. Letting emotions run wild
Home buying is an emotional experience. Homeowners develop real connections with where they live. They seek to put roots down. They envision raising a family there. They want to be part of a community. But sometimes, falling in love with a particular house in a particular neighborhood leads to irrational decisions. If you’ve looked at five, even 10 houses, and decide you simply must have this one, there is no other like it, you run the risk of not getting as great a deal on a home as you might. If you’re patient, there usually can be plenty of fish in the sea.
5. Going it alone
When you’re home shopping, you will deal with the listing agents of the homes for sale. They are obligated to represent a party in that home sale, and that party is the seller. They have a fiduciary responsibility to that seller, not any buyer that comes along. You wouldn’t head into court to negotiate a big legal decision without representation, would you? So why would you head into one of the biggest purchases of your life without representation? A buyer’s agent will have your interests at heart.
It can be tough these days to be a first-time home buyer. In many ways, it can be more confusing and stressful than it was a decade ago. But avoiding certain mistakes can help first-time home buyers make the process a little less tough.