When purchasing your first home, there's a lot of things to keep in mind. In this video, I go over 6 very common mistakes made by first-time homebuyers that are very much avoidable!
First Time Home Buyer MISTAKES
Let’s jump right into it, number 1, probably the biggest mistake that first time home buyers make, and that’s not getting mortgage pre-approval before you begin searching for homes. Believe me when I say this is a very easy mistake to make, I’m a real estate professional and I still lay in bed scrolling through house listings on my phone just for fun while dreaming with my eyes open..
Searching for a home can be a better high than any drug in the world, especially when you find the perfect home you can picture yourself pulling into the driveway every single day after a long brutal day at work, and still smile ear to ear because you can call this place your home. So many memories in the making and a place to build your family, but after getting pre-approved, the home is way out of budget, and the little fantasy in your head vanishes. It’s a terrible feeling isn’t it? The only reason I was so descriptive with this scenario is because I’ve seen it time and time again, and I don’t want it to happen to you too.
So do yourself a favor and get pre-approved before you start your home search, so you know how much house you can afford and your real estate agent can better service you. Instead of focusing so much on the home search at first, take a step back and create a list of what you need in a home along with the things that you want in a home, so once you're pre-approved you know exactly what to keep your eye out for.
Let’s jump on to number 2, this is also a very common mistake that first time home buyers make after they understand how much they can afford. Let’s say your mortgage lender approved you for a $200,000 home, oftentimes they don’t reiterate this enough, but you shouldn’t purchase a $200,000 home as that is typically the absolute max you can afford. And yes, some people’s situations are different as they may have organized their finances a little better, but as a general rule of thumb, try to find a home under your pre-approval amount.
Again, this is a mistake that is very easily made, as buyers will look at $190,000 homes and think “the $195,000 homes are just so much better” then they’ll say “the $200,000 homes look so much better than $195,000 homes, it’s just $5,000 it doesn’t matter” then it becomes a vicious cycle. I know $5,000 won’t change your monthly payment too much, but it’s just the concept that must be understood.
Think about it for a moment, the more money you borrow, the longer it will take you to pay off. If you’re putting more money toward your monthly payment, the less you’ll be able to contribute to an emergency fund, Roth IRa or 401(K).
With that being said, it transitions nicely into number 3, and that is simply moving through the process too quickly. Even if you’re the most unorganized person in the world, it’s crucial to have a plan in hand when it comes to purchasing a home. This will most likely be the biggest financial decision you’ll ever make in your lifetime, so do it right the first time! You definitely don’t need any regrets later about your split second decisions that you could’ve easily slept on.
It’s an exciting time, but don’t let that excitement get you into trouble. Getting the process done and over with fast can result in necessary credit repair that will take years to get back to normal as well as saving again for a sizable down payment and closing costs.
Don’t think 2-3 years down the road, think about your 5-10-15 year plans. Have you thought about having a family in the next 2-3 years? You might want to focus on getting a home with a little extra space so you don’t have to make another move in the near future. Are you getting a promotion to a new position in the next year that relocates you across town? Find a happy medium location so the commute doesn’t become an inconvenience.
That doesn’t mean you should go through the process slowly and wait around for the perfect home that checks all the boxes on your needs and wants list, there will be trade offs and that’s just something you need to accept. You could end up overpaying for a home if you wait too long as well as lose out on the chance of getting a low interest rate because you decided to wait for what the real estate industry calls a “unicorn” or perfect home.
The homes you’re passing up could be a great price in an even better location, but the basement didn’t have enough room for a pool table. I would suggest adding an additional column to your needs and wants list called compromises. You need to make some during the home search!
Number 4, something I've seen countless times as well, and that’s getting tunnel vision on a home without acknowledging what’s going on outside that tunnel. You found the perfect house and you become so fixated on the fact that it checks off most if not all of your wants and needs. That’s great! But what you failed to realize is that home is in a location with the highest crime rate, off of the busiest road in the city, and the schools are rated at a D-.
This goes right along with the point of planning ahead. If you’re thinking of having a child, this may not be the best house for you. Aside from visiting Niche.com to see the rankings and reviews of neighborhoods, and cities you’re thinking of moving to, consider making a trip during the day and see if there are children playing outside or strollers being pushed around the neighborhood. There’s truly no one that knows the area better than your neighbors, and if they feel comfortable with these activities, that’s definitely something to consider.
You might be thinking, the real estate agent should inform you about all this stuff before you even consider taking a look at a home right? Well, to a certain extent. Real estate professionals are bound to a certain code of ethics, so there's a few lines they can’t cross depending on the questions you ask. For example, fair housing and discrimination is a huge part of ethics in the real estate industry, so if you’re questioning race, religion, sex, skin color, family status or nationality, a real estate professional will most likely not give you the direct answer you’re looking for.
Jumping to Number 5, which revolves around most of the points I have mentioned already and that is not budgeting correctly for closing costs and new home expenses. It goes back to the importance of planning! If there’s one thing you take away from this video, I hope it's the importance of planning.
When it comes to saving for a home, first time home buyers think about the down payment percentage and a couple thousand dollars toward miscellaneous closing costs or something like that. But what about the new home expenses you may have not budget for the sticker shock of Utility bills, trash removal/recycling, property taxes, homeowners insurance, outdoor maintenance and equipment, maintenance and repair, tools needed for home improvements, and furniture?
A recent survey conducted by bankrate found that on average a homeowner pays $2,000 on maintenance alone. So finding some cushion in your monthly payment is crucial, especially to your wallet. I know this process seems to be a pricey one, but it could get a lot more pricey if you aren’t aware of the expenses early on in the process. If you have a savings goal in mind and think you’ll just take a nice trip to Mexico with what’s left, think again. It’s better to save more money than not enough, because after closing on your new home happens and you’re aware of your monthly expenses and have an emergency fund set up, you can revisit that Mexico trip idea and you will be stress free knowing you’re financially sound.
And lastly, number 6, which truly ties into every single point I've made so far and that is dining your savings account
There are so many resources out there claiming to have the best tips for first time home buyers by telling you to save for a 20% down payment so you can avoid paying for private mortgage insurance, but then tell you not to drain your savings account on a down payment… uhh what, do they think money grows on trees? What if you want to buy the perfect $225,000 starter home in your market, a 20% down payment on that is $45,000, and that doesn’t include closing costs or any new homeowner expenses.
It’s almost like they assume you have a significant other already that you can combine savings with when the time comes, and of course you’ve both climbed the corporate ladder already at the prime age of 23… A little discouraging to hear isn’t it? That’s society telling you where to be at a certain point in your life. Don’t listen and do what you can do. There’s no reason to stretch yourself thin like that. If you have to put down the minimum and shop at Dollar General for your silverware and plates, so be it, as long as you're happy.
If all of this just seems incredibly stressful, don’t you worry, I have a few resources linked in the description to help you throughout the process. Homeownership is in your near future, I know it .
Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the rising stars of Michigan real estate agents. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in White Lake, Michigan.