35% of home loans in 2016 were to First Time Homebuyers. That being said, I wanted to go over some of the mistakes that I see these buyers making.
[My thoughts as inspired by CNBC 2014 article: 8 biggest mistakes first-time homebuyers make and garnered through my years of experience in the mortgage industry.]
1. They Don’t Count the Cost.
First Time Home Buyers have either rented or lived at home rent free. They do not understand the cost of home ownership with regard to Maintenance, Down Payment, Closing Cost, Insurance, and Taxes. In addition, the average young person is at their job for 2-4 years. When you amortize the closing costs over that time period, renting is the better option.
2. They buy into the belief that No Down Payment means they don’t need any money to buy a house.
Yes, there are 100% loans and Down Payment Grant programs out there to assist with down payment. USDA Guaranteed Rural Development, VA (Veterans Administration), and various local and state Grant programs, but all of them have criteria that needs to be met to qualify.
Closing costs, moving expenses, maintenance items the home is in need of, as well as purchasing a lawn mower, blinds, curtains and other items can quickly amount to thousands of dollars.
3. Buying a home Cost Money.
I council my First Time Home Buyers to save at least 5% of the purchase price of the home before even considering purchasing. Why? The minimum Down Payment requirement of an FHA Home loan is 3.5%. Closing Costs and Prepaids amount to about 3% of the loan amount, and can either be paid for by the seller or can be given as an interest rate credit by the lender. This allows the Buyer to get all the Closing Costs and Prepaids taken care of, and that leaves 1.5% for moving expenses and the other items I mentioned in Point #2 above.
4. They are not prepared to compete in Sellers’ Market.
At the time of writing of this article 01/05/2017, inventories are low in the First Time Home Buyers’ Market. This means that demand out strips supply and many all cash offers are being made. The First Time Home Buyer needs to be prepared to make a quick decision when making an offer and they need to be prepared financially.
Don’t just get pre-qualified for a home loan, give the lender all of your documents to get a thorough loan pre-qualification. That way, when the buyer is looking for a home, they can have an accurate pre-qualification letter from the lender in hand and know how the deal needs to be structured so that they will know their estimated payment and cash out of pocket to close in the price range that they are looking. (See “Why is it important to get Pre-Qualified for a Home Loan”)
5. They Put the Car before the Home.
One of the Key Indicators that we as Lenders look at when qualifying you for a home is Debt to Income Ratios (See “Liabilities and Debt to Income Ratios”)
First Time Home Buyers can have a tendency to go out and make big ticket item purchases like cars, motorcycles, and boats. While this works out in most budgets when they are living at home rent free or in an apartment with multiple roommates sharing expenses, this does not always work out for a home owner. (Read: Sex, Lies, and Overspending: Financial Infidelity)
6. They put too much faith in online information.
While many credit counselors and financial advisers advocate researching mortgages online—it’s a good place to check with the city or county where you want to buy to see if you qualify for products like VA loans and FHA loans—interviewing and working with lenders in person can greatly help demystify the lending process. The process can differ based on a buyer’s qualifications, how a mortgage company operates and current market economics.
Although half of borrowers claim to grasp basic loan terms and conditions, more than 2 out of every 5 bad experiences stem from misunderstandings over fees, terms and ownership costs, according to a recent survey by PricewaterhouseCoopers.
“Go to different places and talk to loan officers to get a feel for what the differences are between similar types of loans,” said ClearPoint’s Pierce, who suggests attending first-time home buying classes. “Sometimes a company won’t charge an origination fee, but then the interest rate is higher… and in some cases you can put many of the upfront costs—closing costs, title insurance—into the loan, which makes your balance larger.”
7. They put too much faith in home values online.
Zillow, Trulia, Realtor.com home values are at best a metric for the value of the home. Location, School District, housing availability, condition, lot features, and even home location/orientation can all contribute to the subtleties of a given market.
Let’s face it! A professional Realtor that has worked and lived in the market is going to understand value way better than any First Time Home Buyer can get from researching home pricing online. Use the services of a Real Estate Professional
There are other items that First Time Home Buyers have a tendency to overlook, but I believe these are the most critical. Some of the information that I used in this article can be read in the article “8 biggest mistake first-time homebuyers make”
So, here is my advice to the First Time Homebuyer:
* Work with a Realtor – the education that you gave yourself online does not make you as much of an expert as an experienced Real Estate Professional that is familiar with the market you are wishing to purchase in.
* Work with a Local Mortgage Broker – Mortgage Brokers have some of the most experienced and talented loan officers. They can provide you with a solid loan pre-qualification letter and help structure the loan to match your payment, cash out of pocket, and loan program.
Hope this saves the reader time, energy, aggravation and money!
Managing Partner, Options Mortgage Services