10 Jul Three Mistakes Today’s First-Time Homebuyers are Making
Rising interest rates and low housing inventory are making it particularly challenging to be a first-time homebuyer. The buyer market is highly competitive, and home are selling for top dollar. This environment puts a lot of pressure on new buyers, and we are seeing rookie mistakes being made.
Here are the three big mistakes today’s first-time homebuyers are making: They are trying to “wait out the market”, they are not getting pre-approved by a reputable lender, and they are hiring the wrong real estate agent. Let’s fix these mistakes and help create better opportunities for new buyers.
Mistake #1 – Waiting Out the Market
No one wants to purchase a home at the top of the real estate market. For the past few years, potential buyers have been waiting on the sidelines hoping for the market to change. To their dismay, home prices have reached record-highs and interest rates are climbing. What a first-time homebuyer may not realize is that there is often a large cost associated with waiting to buy.
While many millennials have taken to social media to complain about home prices and hope for a future market crash, they are leaving money on the table right now. First-time buyers are paying astronomical rents to landlords. According to a recent Realtor.com report, rents were up 26.6% over the past two years. Renters are not gaining equity in a home, and they are not enjoying the tax benefits of homeownership.
Moreover, interest rates have such a significant impact on buying power that an increase in mortgage rates can completely offset any money they hoped to save if housing prices decline.
Let’s say you want to buy a $400,000 home and can make a 10% down payment. With an interest rate of 5%, the monthly payment will be $2,566 per month. What changes if home prices go down, but interest rates rise? This chart shows that if housing prices drop a staggering 10% while interest rates climb to 7%, you will end up paying $159 more every month on your mortgage payment.
While waiting for the housing prices to come down may sound like a smart idea, it is typically a very costly mistake.
Mistake #2 – Not Getting Pre-Approved by a Reputable Lender
The second biggest mistake we are seeing from first-time homebuyers is that they are not getting pre-approved by a reputable lender. The first step most first-time homebuyers take is to start searching for properties. Considering the amount of information available online and on our mobile phones, this makes a lot of sense. It is easy and fun to browse through properties and research neighborhoods.
We encourage buyers to search online for homes, but this should not be your first move. The most important thing for a first-time buyer to do is to interview mortgage lenders, hire someone you trust and get pre-approved for a home loan.
Nearly three in five first-time homebuyers felt the market was more competitive than they expected. An overwhelming 98% of first-time homebuyers lost a home in which they were interested. How can a first-time homebuyer compete?
If you are a first-time buyer and you want to have your offer accepted, you absolutely must be pre-approved by a reputable lender. Remember, being pre-qualified is different from being pre-approved. The pre-qualification process is quicker, lighter and can often be done online with self-reported information. It is a good starting point to gauge your buying power but being pre-qualified does not carry the same weight as being pre-approved does.
The pre-approval process is more in depth and involves having a professional mortgage lender review your finances. A lender will run your credit, review your assets, and provide a conditional commitment to the borrower in the form of a pre-approval letter.
A seller who is receiving multiple offers on their house is not going to risk starting a transaction with a buyer who has not been thoroughly vetted. Having a pre-approval letter from a reputable lender can give a first-time buyer the credibility they need to get an offer accepted. A pre-approval letter shows that a homebuyer is serious and has the finances to follow through on a home purchase.
There are also many other benefits to getting pre-approved by a good lender. First-time homebuyers may qualify for government aid programs or tax credits. A first-time homebuyer may not want to get a traditional 30-year conventional mortgage while rates are high. A professional lender can explain the advantages to Adjustable-Rate Mortgages and the options to refinance a home when rates drop. Home financing is complicated and the smartest thing a new borrower can do is to hire someone they trust to help them navigate the process.
Mistake #3 – Picking the Wrong Real Estate Agent
It is very common for a first-time buyer to choose a friend or family member to be their real estate agent. This can lead to many challenges and often puts the first-time buyer at a disadvantage in a competitive market. Before you hire someone, you know to represent you as a buyer, make sure they are the most qualified professional for the job.
Real estate is hyper-local. Top agents often specialize in specific neighborhoods or niches in the market. A real estate agent’s intimate knowledge of their local market can be a huge advantage for a first-time buyer. A local agent will know other local agents and often will hear about new properties coming to the market before they are announced to the public. When inventory is low, being able to get an offer in early is a big deal.
Buyers will often hire a friend or family member because they are expecting some type of a deal. Be careful with this. The real estate industry is highly regulated, and a buyer’s agent is not allowed to offer referral fees or incentives back to clients. Furthermore, when you ask someone to work for you at a lower cost, the quality of their work tends to suffer. A friend is more likely to cut corners or skip steps in the home buying process. For a first-time homebuyer in a competitive market, this can do a lot of damage.
It is important to hire a real estate agent who will put in the work to help you find the best properties, write a compelling offer, negotiate strongly on your behalf, and give you sound advice throughout the process. Only consider hiring a friend to be your real estate agent if they know the local market intimately, have years of experience collaborating with buyers and are committed to giving you the highest level of support through the process. Don’t risk your home purchase or friendship if you have any concerns.
Ninety-two percent of first-time homebuyers say they would do something differently if they were in the market for a new home. Many wish they had done more research and hired a better team. While you cannot control the market, you can have a more positive home buying experience by avoiding these three big mistakes. Do not try to wait out the market, get pre-approved by a reputable lender as soon as you can and hire a real estate agent with local experience.
If you have more questions about being a first-time buyer, please reach out. We are here to help.
This article is intended to be accurate, but the information is not guaranteed. Please reach out to us directly if you have any specific real estate or mortgage questions or would like help from a local professional. The article was provided by Sparkling Marketing, Inc. with information from resources like Realtor.com, USNews.com and OpenDoor.com.