It’s a roller-coaster of emotion that’s both exciting and nerve-wracking. And whilst buying your first home elevates you to an all time high, just one of these first time home buyer mistakes can send you crashing back down to earth like a meteorite.
In this post I’ll walk you through 26 of the most financially destructive mistakes that first time home buyers make and what you can do to avoid them.
1. Delaying Your Home Purchase
You’re buying a home to live in, right?
But its still an investment, yes?
The biggest investment of your life?
And you’ve heard that time in the market is way more effective at maximizing investment returns than timing the market, haven’t you?
Well I see see people every day hesitating to get into the housing market because they’re waiting for the “right-time”.
Let me tell you something.
The best time to invest in the housing market was 20 years ago. The second best time is NOW!
So what are you waiting for?
Action: The housing market in the USA (and in most developed countries) has been growing rapidly since about 2012. The best way to participate in this growth cycle is to get into the market now.
2. Making Incorrect Loan To Value Assumptions
Some lenders require a 20% down payment.
But what if I told you it’s possible to obtain mortgage finance with as little as 3.5% down?
Even better… what if I told you that you could get a 100% loan if you qualify?
Did you know that there are first time home buyer programs to help people to get into the property market?
Maybe you’ve heard things from friends …
… or seen things online.
Put your pre-conceived ideas behind you.
Most times they’re either grossly incorrect ….
… or misinterpreted.
What You Should Do: Don’t rely on online or hearsay information. Get in touch with a mortgage originator. They’re familiar with mortgage lending criteria across multiple lending institutions as well as first time home buyer programs.
3. Not Having A Contingency Fund
Are you about to use all your savings for a down payment and closing costs?
Most people do.
What happens if you need to cover any unexpected maintenance costs?
They invariably crop up after taking occupation. Then what?
Do you want to land up having to take out a short term personal loan?
Or load up your credit card?
The interest rates on these instruments aren’t very attractive, are they?
Even worse … what if you’re forced to turn to your parents?
Can you imagine the embarrassment?
Here you are buying your first home…
And then, boom! You need to ask for help.
What you should do: Irrespective of what lenders may offer you, make sure you buy a home at a price that is affordable and retain enough liquid cash to cover contingencies.
4. Making Too Big A Down Payment
I can’t believe you just said that.
It’s exactly the opposite of what I’ve been reading.
Is all that other stuff wrong?
Well yes and no.
It’s a double edge sword.
But listen up.
Just hear me out on this one because it may be:
- the solution to NOT depleting all your savings,
- whilst at the same time reducing total interest paid and the loan term.
Wondering how that’s possible?
Quite simply, you apply for loan with the absolute minimum down payment. You may even have to increase the loan amount a little to make this work.
And yes, you must be able to afford the repayments.
That’s why it’s a double edge sword.
Once the loan is registered you simply pay (most of) your remaining savings into the loan. (NOTE: You must ensure that you take out a mortgage that allows you to access your additional money).
Here’s what you achieve:
- You put yourself into the same position you would have been in had you used your savings as a down payment.
- You can now access your additional capital (now your contingency fund).
- The additional funds now reduces your outstanding capital amount owing.
- Interest now accrues on a lower outstanding balance translating to a substantial saving.
- Maintaining normal repayments (based on the larger loan amount) reduces the loan term substantially.
Let’s look at an example to highlight this.
- Mortgage loan size after minimum down payment: $320,000.
- Interest rate (fixed): 4.6% per year.
- Points: excluded from calculation.
- Loan term: 30 years.
- Additional funds: $50,000.
- Regular monthly repayment: $1640.46.
Total interest payments over 30 years: $270,566 (on original loan).
Extra capital reduces loan term to: 21.52 years (after additional payment).
Total interest payments over new term: $157,366 (after extra payment).
Interest saved = $113,200.
Can you scoff at that?
Okay… I can hear you saying that you could achieve the same result by taking a lesser loan.
But then you have to pay in all your savings …
… and you wouldn’t be able to access your money, would you?
What You Should Do: I made you a combined mortgage calculator / down payment calculator. Play around with your own figures and find a solution that works for you.
PLEASE US COMMAS WHEN ENTERING DECIMALS – (SORRY MICROSOFT GLITCH)
5. Choosing The Wrong Kind Of Loan
Confused about fixed rate and adjustable rate mortgages (ARM)?
Here’s the low down.
Most folks (in the USA) are opting for fixed rate loans.
These can either be fixed over the entire term or over a chosen period.
So what’s the most popular option?
The 30 year fixed mortgage … by far!
But how wise is this option really?
… there’s nothing wrong with a fixed rate loan as long as you know what you’re getting into.
Let’s face it.
Banks and other lenders are in business to make money, right?
Of course they are!
Did you know that the bulk of most banks’ income is derived from interest earned on mortgages?
Are you aware that their greed is exactly what fueled the financial meltdown in 2008?
CNBC reckon that 30% of homeowners don’t even know their mortgage rate!
Banks base their rates on expected interest rate movements in the future.
They take a forward position.
Do you think they offer attractive fixed rates out of the goodness of their hearts?
Of course not. That would be silly!
If you can get a fixed rate of say 6% today, wouldn’t it make sense that lenders are then expecting interest rates to move downwards by at least a couple of percentage points over the term of your loan?
Sure it does.
How else do they make money?
A variable rate loan will adjust upwards and downwards based on interest rates but over the long term you must take a position on which option may be more financially viable for you.
An ARM may just save you a substantial amount of money.
Action: Do some of your own financial research (if possible) before making any decisions. You may be best served by speaking with a financial adviser or some other person involved in the financial sector well before purchasing a property and at least before choosing a mortgage.
6. Not Using A Mortgage Originator
Interest rates have a huge financial effect on mortgages.
Using the example above, a mere 0.25% difference in rates translates to a saving in repayments of $16,920.
Are you up to approaching many different lenders for a mortgage?
Each application involves a ton of paperwork …
… and it’s time consuming … let alone being mentally draining!
And what’s more is that you have no leverage to negotiate the best rate between different lenders.
You can’t play one up against the other.
A mortgage originator, on the other hand, has access to multiple lending institutions.
They deal through different management channels and have open lines of communication with lending staff and managers.
Do you have any idea how many mistakes lending staff make when assessing a mortgage application?
A mortgage application goes through at least 3 to 5 different departments before landing up on the credit manager’s desk for final approval.
And just one small mistake along the way can screw up the entire application.
A mortgage originator will be able to rectify theses errors.
And more importantly, they will shop around and negotiate the best interest rate on your behalf.
Action: Make sure you appoint a mortgage originator to source the best mortgage deal for you.
7. Not Getting Loan Pre-approval
Do you know exactly how much you can spend on a home?
A rough estimation based purely on income is called a pre-qualification …
… but it doesn’t mean that you’ll actually get a loan when applying.
Because a pre-qualification doesn’t go through a credit approval process.
What if you’re listed on a credit bureau because you defaulted on a furniture account last year?
You may not get the loan, right?
So it’s important to get a proper pre-approval that’s been credit assessed, isn’t it?
That way you get all your ducks in a row before you buy.
And without knowing this, how can you possibly shop around for properties in the right price range?
It’s like throwing darts blindfolded!
More importantly, a pre-qualification puts you into a much stronger position to negotiate with a seller because you won’t have to go through credit approval.
If you were a seller, wouldn’t you feel more comfortable knowing that there will be no issue with finance?
Sure you would.
Especially if there were multiple offers on the table.
All of your documentation and credit criteria (scoring and assessment) will have been checked and your employment will have been confirmed.
You won’t have to make your offer contingent upon loan approval.
Other than the lender having to find sufficient value in the property, your offer to purchase is almost as good as a cash deal.
Action: Appoint a mortgage originator to to approach multiple institutions on your behalf in order to obtain a pre-approval.
8. Including Closing Costs In Your Loan
Why would you want to include closing costs in your mortgage?
Because you don’t have the money?
That will just increase the size of your loan and then interest accrues on it too …
… over the entire term of the loan.
This increases your monthly repayment by $65 and adds a whopping $10,695 of interest to your loan.
That almost doubles the closing costs!
It is also likely to [negatively] affect the rate of interest the lender will provide to you thus exacerbating the unfavorable financial effects even further.
Action: Establish the quantum of costs you will be liable for when you purchase a home and save enough money to cover the costs in cash.
9. Failing To Build Your Credit Score
Do you know your credit score?
Do you know that your credit score is basically your financial reputation?
And are you aware that it’s better for your credit score to have a track record of well paid accounts as opposed to having none?
So how does anyone even know what my track record actually is?
Well, many credit grantors report payment history details to credit bureaus who keep track of all these details …
… but not all of them do.
So what you’re saying is that I need to run some accounts to prove my ability to pay?
Vehicle finance, cellular contracts and credit cards are a great way to build your credit score.
And if you want to have a crack at getting the best mortgage rates, you need to build your credit reputation.
Action: You need some credit to prove that you’re a good credit risk. The best thing to do is to take out some credit facilities way before you buy a property. In many countries, mortgage lenders like to see a 2 year repayment history, together with no default or judgement information.
10. Failing To Reduce Debt Before Purchasing A Property
Yeah, I know. I just told you to get some credit. Now you’re telling me to reduce it.
Welcome to the real world!
It’s a fine balance.
Yes, you need to build your credit score in order to secure the best mortgage deal …
… but it’s also crucial to reduce any major debt before applying for a mortgage.
Lenders want to see that you don’t take on unnecessary high levels of debt.
The greater the level of debt, the more risk there is of defaulting!
Remember, lenders look at your overall debt to income ratio.
So if you want to buy your dream home, you must give yourself the best crack at getting that mortgage.
Action: Pay down high levels of debt before purchasing a home. The biggest culprits are cars and credit cards. I suggest you follow some advice about the things rich people do that you need do too.
11. Applying For Credit Before Your Property Purchase Closes
Are you aware that lenders perform a final credit check just before the deal closes?
So why would you jeopardize your dream home?
What if the lender finds that you no longer fall within their qualification criteria?
Applying for credit before closing is a surefire way to derail your dreams.
Action: Refrain from taking on any further credit until after your deal is closed.
12. Not Accounting For Or Underestimating Closing Costs
In all the excitement and euphoria of buying a home, it’s easy to forget about those additional costs.
And you don’t want to apply for another personal loan before your deal closes, do you?
Action: Make sure you have all of your financial ducks in a row before you put pen to paper. It’s always a good idea to have an emergency fund or contingency fund to cover any contingencies.
13. Failing To Appoint A Buyer's Agent
A seller’s agents acts for the seller.
Their agenda is to achieve the best possible financial outcome and to secure the safest deal.
So they don’t have YOUR interests at heart, do they?
A buyer’s agent will help you:
- To find suitable properties that match your criteria and price range.
- To negotiate the offer to purchase on your behalf thus achieving the best outcome for YOU.
- By referring you to other trusted professionals, e.g. mortgage brokers.
14. Not Negotiating A Commission Rebate
You can’t negotiate with the seller’s agent, can you?
Because they’ll tell which lake to jump in!
But you can certainly ask for a commission rebate from your buyer’s agent.
This is an amount that YOUR agent refunds to you after the sales closes. (Note: certain states prohibit commission rebates).
You don’t have to worry about paying your buyer’s agent.
Very simply, the listing agent pays the buyer’s agent from the total commission that is earned on the sale and paid by the seller.
Action: Ask for a commission rebate. You’ll never get what you don’t ask for. The best thing to do is to pay this extra money into your loan.
15. Being Unduly Influenced By Real Estate Agents
Yes you should have buyer’s agent.
And it’s fine if your agent is motivated by money …
… we all are!
That’s normal human behavior.
But if your agent puts money before your needs, that’s a problem.
Action: Check out your agent’s credentials. Ask for testimonials from satisfied clients. Watch that your agent isn’t just showing you properties that will attract higher commissions. Tell your agent at the outset that you are aware of such practices and that you may ask about commissions. Furthermore, don’t rely solely on the agent. Make certain to also search for suitable properties yourself to ensure you’re seeing all the properties you need to..
16. Gauging The Market By Asking Prices Instead Of Sales Prices.
I never seen a realistic seller at the outset of a real estate marketing campaign.
They normally have to undergo a process of “conditioning ” (I hate that word but it’s very descriptive) to get them in line with the market.
And depending on the seller’s motivation to sell, this may take some time.
Most sellers also price their properties up to leave some room for haggling.
The worst mistake you can make is to judge the level of the market by asking prices.
They’re not indicative of true value.
And believe it or not, 99% of buyers do it. At least initially.
Action: Get hold of sales figures in the suburb/s you’re looking to buy into. If you have a buyer’s agent, ask them to provide you with relevant sales data. Better still, ask them to put together a comparative market analysis (CMA). After all, they will be paid for their services.
17. Buying In The Wrong Location
Do you know about the 3 most critical considerations when buying a property?
It’s better to buy the smallest property in the best possible neighborhood than to buy the biggest property in a not so good part of town.
You’ll get the best resale value that way.
And if, for any reason, you have to sell in the short term, you’ll minimize any downside.
Action: Research and do your due diligence before you put pen to paper. Also check for things like school zones, public transport and amenities. They all make a difference to sales prices.
18. Purchasing A Property On Auction
Want to know why sellers choose the auction method of sale?
Because it’s the best way to achieve the best price for a property …
… and the chances of a cash sale are considerably higher.
And the entire sale process is much shorter.
A good auctioneer will under-quote the expected sale price (market value) quite considerably, leading people to believe that they could snatch up a bargain.
How else do you think an auctioneer manages to fill up his auction room with qualified buyers that are ready to transact immediately?
Don’t be misled by the process.
Properties sell for no less than normal market related values …
… and very often, premium prices are achieved as a result of emotional buyers bidding against each other in a competitive environment.
So it’s not the best way for a buyer to purchase a home, is it?
Action: Stick to looking at, and purchasing properties that are priced and for sale by old fashioned, conventional methods.
19. Purchasing An FSBO Property
Private sale (for sale by owner) properties are invariably over-priced.
At least that’s the case when they first come onto the market.
Many private sellers attempt to flog their properties at a high price whilst also avoiding commission costs.
Why is this attractive to them?
Well the reasons for this are varied.
Either they’re just plain greedy or, in many instances there may be some underlying financial problems that they have.
And they see their property as a solution to this.
They ask more than true market value hoping to cover their financial ills with the difference.
Truth be told, there are no buyers running around with suitcases full of money and nowhere to live!
Action: Due diligence is essential if you fall in love with a home that’s being sold privately. Check out sales prices of comparable properties in the neighborhood to ensure that you won’t be over-paying. Consider appointing a lawyer to handle the agreement of sale (offer to purchase) on your behalf.
20. Failing To Check The Property Title
Do you know exactly what you’re buying?
What’s the land tenure?
Are there any easements, covenants, restrictions, caveats, liens, life estates, usufructs etc. (country specific) over the land use?
Failure to check the property title may result in your neighbor having a right of use over your property!
Action: Request a copy of the title and have a legal person look over it for you.
21. Going Unconditional (Removing Contingencies)
How much do you know about contingency clauses?
In certain countries sale agreements may include one or more contingency clauses (suspensive conditions).
In others you may need to insert some.
A contingency clause is one where the contract cannot proceed unless a specified condition is fulfilled.
These are normally time, performance and money based conditions.
An example is where a purchase is made contingent upon a mortgage loan being granted for a specified amount and within a specified time period.
Another is an offer to purchase subject to the successful conclusion (fulfillment of financial guarantees) of an existing property …
… usually to transfer equity or avoid two mortgages.
What about those specifying that the seller must pay a certain dollar amount towards closing costs?
Or the seller warranting to repair a specified defect before closing?
Removing contingencies may expose you to loss of your down payment (earnest money) if a contract cannot proceed.
Action: Don’t remove any contract conditions unless you are certain that they absolutely don’t apply or were already complied with.
22. Not Getting A Building Inspection
Would you want to purchase a termite infested home?
Or worse still one where a structural defect exists?
Then why would you waive a building inspection?
Those are just two examples of the many risks you could expose yourself to.
Remember that the seller is responsible for everything pertaining to his property until the deal closes.
If there’s a defect, you can enforce that it be rectified.
After closing, it’s your baby!
Action: Make certain to include a building inspection contingency clause in any offer to purchase. Never take an agent’s word for the property being free of defects, let alone anyone else’s.
Are you easily influenced by reality TV shows and the allure of making fast money?
Don’t feel alone!
Many folks are. Too many!
Are you planning to do any immediate renovations or make-overs?
If so, you need to ensure that you can recover the costs within a relatively short period.
The last thing you want is to find yourself in a financially compromised position and have to sell the property unexpectedly.
Imagine how much money you could lose!
Action: Shop around for quotes to ensure you renovate cost effectively. Minor renovations are fine but if you intend to do any major work it may work out substantially cheaper to purchase a property that has already been renovated.
24. Relying Too Heavily On Contractor's Quotes
How many contractors have you dealt with in our lifetime?
If you’ve ever had a building contractor or renovator give you estimates you’ll know full well that you should add at least an extra 10% to 15% to their quotes.
Wanna know why?
Because most contractors have this terrible habit of under-quoting …
… in order to secure the job.
Then afterwards they find all sorts of extras and additions that you didn’t bargain for.
You know the old saying, “it’s easier to ask for forgiveness than permission”?
Action: Did you read the small print on the reverse of the quote? Never mind getting the old touted 3 quotes. Get 6. An irregular variance in figures spells trouble.
25. Not Paying More Than The Regular Mortgage Repayments
Do you know what a difference a little extra monthly contribution to your mortgage can make?
It can can substantially reduce the total amount of interest you pay over the term of the loan.
That’s because extra funding effectively reduces the capital amount of the loan and concomitantly reduces the term.
Action: As long as you can access your extra funds, pay as much into your loan as you possibly can. Use it almost as a savings account and dump all your extra cash into it. It can save you a small fortune. I did it with my home many years ago and I paid it off in 13 months.
Wrapping Up ...
26. Buying From The Heart And Not From The Head.
Emotional decisions are normally regretted long after the joys of home ownership are forgotten.
Almost every one of the above first time home buyer mistakes can be avoided by removing emotions from the equation.
If you’re easily led by emotion, there’s no harm in asking a level headed person to accompany you throughout your negotiations.
What will you do?
Leave me a comment.