8 biggest mistakes first-time homebuyers make

The housing market is hot, thanks to favorable interest rates and home prices that remain relatively low around much of the country. But along with a hot housing market comes increased competition.

"There's not a high volume of home inventory out there," said David Norris, president and COO at non-bank mortgage lender loanDepot. "And many of the lower-priced homes are going for cash."

Given the complexities associated with the costs of buying a house, jumping into the market and effectively competing with aggressive bids can be daunting. If done wrong, a home purchase can result in enough financial regrets to last a lifetime for first-time homebuyers.

Here are eight of the most common mistakes made by first-time buyers — and how to avoid them.

1. They don't consider renting as the better financial decision.

Despite all the good that comes with owning a house — home equity, tax benefits and comfort in knowing what your housing costs are going to be over a period of time — when it comes to the heap of costs associated with buying, it may be a better deal financially to rent. (Buyers can find help with online calculators that compute home costs into equivalent monthly rents.)

The first question is, "How long do you expect to be there? The average young person is at their job for two to four years, and when you start to amortize closing costs over that period of time, it just doesn't make sense," said Brad Wheelock, a senior vice president and branch director at RBC Wealth Management. "What's the likelihood that you'll get out of that home without too much financial damage?"

Buyers need to realize that all of the expenses renters never have to worry about, such as homeowner's insurance and closing costs, may end up being as much as a down payment. And that's not even including all the unseen maintenance fees.

2. They’re not prepared to compete in an all-cash market.

Not every homebuying market today is as competitive and expensive as New York, L.A. and the San Francisco Bay Area, where housing prices are exorbitant, demand far outstrips supply and all-cash offers are common. But given the expectation that mortgage rates and home prices will continue to rise around the country over the next few years, the most important thing prospective buyers can do is be financially prepared as early as possible.

Buyers must be ready to make very quick decisions as their markets heat up. "Much of the lower-priced stuff goes quickly," said loanDepot's Norris. 

Before even starting your search, save as much as possible for a down payment, clean up any blemishes on your credit report and get preapproved for a loan.

3. They put the car before the home.

Your debt-to-income ratio is one of the first things lenders look at when it comes to assessing how well you'll be able to afford mortgage payments. "It's a big deal for folks not to load themselves with debt before they buy a house," said Glenda Gabriel, a neighborhood lending executive at Bank of America. "[Debt] could be the difference between approval and not being approved."

According to loanDepot's Norris, customers' debt — attributed today mostly to student loans followed by things like car payments — has gone on average from $40,000 in 2010 to $51,000 today. "It would be much easier to own a home if you can show a history of saving and not have gotten yourself into too much debt," he said.

4. They put too much faith in online loan 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 two out of every five bad experiences stem from misunderstandings over fees, terms and ownership costs, according to a recent survey by PricewaterhouseCoopers.

5. They put too much faith in online home values.

When it comes to checking out houses and neighborhoods online, real estate agents have become wary of what clients find at sites like Zillow and Trulia, which can give buyers a false sense of home values.

"My rant of the moment is Zillow and what we have to undo," said RED's Barrentine. "If a buyer believes that the actual value of the property is $1.1 million [as listed online] when it's really $1.3 million, it's a real disservice to the client. You really should [spend time] with someone that understands the market, someone who's there day in and day out."

John Raoux / Today
Realtor Greg Gammonley, right, with, shows off a home to prospective buyer Maddie Coker in Orlando, Fla., in this Friday, May 23, 2014 photo.

Driving around neighborhoods with an agent highlights the subtleties of a given market, things not easily represented online — like how one side of a canyon gets darker earlier, making it less valuable than the other side. Kirsten and Darrell Becker, co-owners of Becker Studios in Santa Barbara, California, suggest buyers step out of their comfort zone and drive by prospective houses at night. "Hear what it's like when not everyone is at work," Kirsten Becker said.

6. They skip the home inspection.

About 10 percent of recently bought homes weren't inspected, according to Bill Loden, president of the American Society of Home Inspectors. These buyers were trying to cut costs, forgoing the fee that inspectors charge to perform a two- to four-hour search to flag material defects of the property, but those defects can result in thousands of dollars of damage down the road. Inspection rates start at $450, on average, and vary depending on a home's size and how it was built, according to Loden.

While buyers should tag along with the inspector and ask questions about cracks, water stains and odd smells, Loden cautioned that there are always "latent defects that inspectors cannot see."

Buyers should inspect basements, attics and mechanical rooms to see how well maintained they are and ask about conditions specific to certain areas — radon in the Midwest, sewers in California and active clay soils in Dallas, which can cause problems for foundations. Also, don't be afraid to "follow your nose," Kirsten Becker said. Mold, gas leaks and long-term dry rot can often be detected by their smell, she said.

7. They forget to check the (wrong) emotions at the door.

In a competitive market where multiple offers may essentially be the same, "the sellers will choose almost every time to sell their home to someone who [appears to] really love it," said Amy Mizner, principal of real estate firm Benoit Mizner Simon & Co. "Most buyers don't realize they are being 'interviewed' by the listing broker, and if they complain the whole time or get exasperated about what are ultimately small-ticket items, they will make a bad first impression."

While it's important to note cracks and inquire about things like potential rodent problems in wooded areas, Mizner said buyers should not become fixated on these things while seeing the home. Save those questions for a broker, who should help clients do due diligence after a home tour.

8. They expect their home’s value to appreciate over time.

Many first-time homebuyers invest their life savings into a home, hoping to turn a healthy profit when they sell five, six or seven years down the road. "I think a lot of people got burned doing that in the 2000s," Carden said. "And while to a certain degree it's really nice to get home equity for money you'd be paying for rent, it's a large asset that's not very liquid."

Buy a house to live in, Carden said, and be prepared for lots of unseen upkeep costs that range from mowing the lawn to emergency repairs.