7 Common First-Time Homebuyer Mistakes
Buying a house for the first time is a new experience, so it’s normal to have a few missteps along the way.
A home is the single most expensive purchase for some people. On that account, mistakes related to the buying process can have an impact on your finances. But with a little education and a lot of preparation, you can have a smooth experience with minimal stress.
Here are seven common rookie mistakes made by first-time homebuyers.
1. Finding a Home First, and a Mortgage Later
Some first-timers believe that the home buying process starts with the home search, but it actually starts with a mortgage pre-qualification.
A pre-qualification is the starting point because it tells you how much you can spend on a property. Without this knowledge, you could potentially fall in love with and place an offer on a home outside of your price range.
Before you schedule an appointment to look at properties with a real estate agent, speak with one of our experienced loan experts to get pre-qualified for a home loan. This way, you don’t waste your time, your agent’s time or the seller’s time.
2. Spending the Max Budget on a House
Keep in mind that the amount you’re pre-qualified for is the maximum you can spend on a property. You don’t, however, have to spend this much on your home purchase. Your first property doesn’t have to be your forever home, so it’s okay to spend less and ease into homeownership.
If you make the mistake of spending your max budget on a property, you could end up house poor. This is when your house payment eats up a large portion of your income, leaving little income for discretionary spending.
Remember, buying a house involves more than making the mortgage payment. You’re also responsible for utilities, home maintenance and repairs, so be realistic with regard to affordability. If possible, spend less than what you can actually afford and put the extra income toward building an emergency fund for unexpected expenses.
3. Thinking You Need 20 Percent Down
Purchasing a home with 20 percent down has its benefits. A larger down payment reduces your loan amount and monthly payment, it can help you secure a lower mortgage rate, and you’ll avoid mortgage insurance. Mortgage insurance is required on most loans without 20 percent down.
In spite of these benefits, a 20 percent down payment isn’t mandatory for many home loans. In fact, you can qualify for a mortgage loan with far less. Some conventional loan products only require between 3 percent and 5 percent down, and FHA loans only require between 3.5 percent and 10 percent down.
Saving up a 20 percent down payment is an excellent goal, yet it can take years to drum up this type of cash. If you delay purchasing a house until you’ve saved this much, you could miss out on lower interest rates and lower home prices. If mortgage rates and/or home values increase in the future, you’ll end up paying more for your property.
4. Underestimating the Costs of Buying a Home
One disadvantage of being a first-time homebuyer is that you’re dealing with mortgage-related costs for the first time. And unfortunately, some first-timers underestimate how much they’ll need for the purchase.
Even if you’re aware of down payment requirements, you might not be aware of other costs, namely closing costs. These are fees associated with a home purchase paid at closing. These can include the loan origination fee, the credit report fee, attorney fees, title search fees, appraisal fees and prepaid interest.
Closing costs vary, but typically range between 2 percent and 5 percent of the home purchase. Some loan programs allow seller-paid closing costs which can help minimize your out-of-pocket expenses.
5. Draining Your Savings Account to Buy a House
Not only should you avoid spending your max budget on a purchase, you shouldn’t buy a home at the expense of your savings account. While a smaller cash reserve is to be expected after closing on a home, don’t make the rookie mistake of emptying your savings account.
Homeownership involves a new set of expenses that go beyond the actual mortgage payment, so it’s important to leave some cash in reserves after the home purchase, perhaps two to three months of mortgage payments.
6. Forgetting to Check Your Credit Report
Your credit score plays a big role in getting a mortgage. For that reason, along with keeping accurate financial records, make sure you pay attention to your credit report and credit score.
Order a copy of your three credit reports at least every 12 months. Carefully analyze your reports and dispute erroneous information, especially negative items reported in error. These mistakes can decrease your credit score.
Since your credit score also affects your mortgage rate, aim for a higher score before applying for a home loan (pay bills on time and pay off debt). Even though you can get a conventional home loan with a credit score as low as 620, and an FHA home loan with a score as low as 500, a score in the mid-700s or higher will help you secure a more favorable interest rate.
7. Getting New Credit After a Mortgage Pre-Qualification
Some first-time homebuyers also make the mistake of thinking that their pre-qualification guarantees a mortgage. It’s true that a pre-qualification indicates that you’re a suitable candidate and you’re most likely to get the mortgage. Yet, nothing is final until you’ve signed your mortgage paperwork at closing.
Your pre-qualification was based on the preliminary information you’ve given about your credit, income and debt load. Therefore, make sure there aren’t any major changes to your credit or finances between the time that you’re pre-qualified and closing.
Don’t take on any new credit or change employment until after closing. An increase in your debt-to-income ratio or an income reduction could jeopardize your approval or affect your mortgage rate.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.