Letting folks know that you’re looking to buy your first home can open a floodgate of unsolicited advice from friends and loved-ones.
Your Aunt and Uncle bought their home during the Reagan administration, but are now suddenly experts on real estate and mortgages. Your cousin saw a show about house flippers in Waco on TV. Now she wants to tell you all about the housing market, (even though you live in Portland). Your sister with four kids and a house in the suburbs suddenly wants to share all of her thoughts on what you should be looking for in a home for yourself.
Words of wisdom from friends and loved-ones are almost always offered with the best intentions. But advice that worked for other homebuyers may not be good advice for you. And what worked in the past may not work for homebuyers today. We’d recommend taking homebuying advice from family and acquaintances with a grain of salt. Here, we’ve got four bits of bad advice that first time homebuyers should definitely ignore.
Leave Room to Negotiate and Offer Less Than You’re Willing to Pay
Start low so you’ve got room to move up is good advice for haggling over a rug in Marrakech. And it was probably decent advice for your parents when they bought their first homes decades ago.
But things change. Right now, most housing markets in the US are pretty tight, especially on the starter-home end of the spectrum. And most sellers would generally prefer to avoid a long negotiating process, if they can. Bidding low in a situation where many buyers express interest can leave you out in the cold.
Plus, sellers (and buyers!) have access to more complete information about sales figures for comparable homes than ever before. Decades ago, agents researching sales figures for homes in an area would have to plod through sales records manually. And details about home features or condition issues that might have impacted other homes’ selling prices weren’t always easy to collect or quantify. But that’s no longer the case. (Thanks, computers!)
Now, by the time a home is listed on the market, sellers generally have a pretty good idea about what their home is potentially worth. If you offer significantly less than what a seller knows their home ought to sell for, the seller could feel insulted. Your attempt at low-balling your offer to start a negotiating process could backfire.
Your Down Payment Should Definitely Be 20% or Higher
Deciding how much to put down on your home is a personal matter. A 20% down payment may be the traditional target—and 20% down will help you avoid paying mortgage insurance. But traditional may not be the right choice for your current financial situation.
From 1985 to 1999, the typical American home cost roughly 2.6 times the median household income. But houses cost more than they used to, even accounting for inflation and higher earnings. As of the end of 2018, the average American home costs about 4.3 times the median household income. And that’s just the average. Would-be buyers in high cost of living areas are looking at housing markets where the average house costs even more.
All of which is to say, that 20% down payment threshold? That may not be feasible or advisable for most first time homebuyers today. Most homebuyers put down about 10% these days—and first time homebuyers often put even down less.
The good news? Interest rates are currently near historic lows. (Ask your favorite baby boomer about the double-digit mortgage interest rates of the 1980s.) And mortgage insurance, if you have to pay it, isn’t terribly expensive. For many homebuyers, the difference in the monthly cost of a mortgage with or without mortgage insurance is about as much as a few takeout dinners per month.
So, unless your well-meaning Uncle wants to just give you the tens-of-thousands of extra dollars you’d need to get your down payment up over the 20% mark, you can politely ignore his insistence that you really ought to make that traditional hefty down payment.
Buy a House to Grow Into
Loving the single life? Focused on your career? Not looking to start a family now, or maybe ever? Real estate agents and family members love to tell first time homebuyers to buy a home larger than they currently need—with the idea that the extra room will come in handy, in time. That studio in the city center might be appealing now, but what about your future family?
Thinking about your future housing needs is smart when choosing a home to purchase. But it’s one thing to buy the three-bedroom, two-bath in a nice school district when your first kiddo is still a bun in the oven. It’s another thing all together to buy a larger home than you really need. Choosing a home because you or your family imagine that your life will radically change in the future is silly.
When choosing a home to purchase, think carefully about what you really want in a home right now and for the next few years. Don’t assume that you’re buying the only home you’ll live in for the rest of your life. If your future circumstances change, you can buy a different home in the future. Really. (And the equity you’ve built in the home you’re buying now could potentially help.) A larger home than you really need means more time and money spent on upkeep, higher heating and cooling costs, more rooms to furnish, and probably a higher mortgage bill. Save yourself the trouble, and feel free to ignore the well-meaning advice to buy more home than you’ll want for the time being.
Use the Lender Your Real Estate Agent Recommends
Your real estate agent is probably a smart and charming person. We’ll also bet that she knows lots of people, including at least one nice mortgage broker or lender agent.
Most people would be suspicious of someone who advised them to marry the first person they dated or buy the first car they looked at on the lot. But a surprising number of people go with the first and only mortgage lender they approach about financing their home purchase. And it’s often a lender or broker chosen at the recommendation of their real estate agent.
It’s not legal for real estate agents to take kickbacks from mortgage brokers or lenders. So your real estate agent’s stake in you choosing a lender only really matters insofar as is necessary for you to get approved for your mortgage and close on your home.
But as a buyer, it does matter to you which lender you choose. Looking into more than one potential lender could save you hundreds of dollars a month or thousands of dollars over your time as a homeowner. Taking the time to investigate your mortgage options is a smart move. A good real estate agent can offer some insight into the types of lenders and brokers to avoid. But your real estate agent should understand that you’re the one who is going to be paying this mortgage for years to come. And that means it’s important for you to investigate your options thoroughly.
Here at Morty, we help first time homebuyers navigate the process of securing financing to buy a home. We believe in transparency, and we work with our borrowers from pre-approval through closing day. If you’re ready to get serious about buying a home, we’re ready to help make getting your mortgage easy.