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As a first-time homebuyer, it can be easy to make some classic mistakes — but you don’t have to fall victim to these. Here are 10 of the most common errors first-time buyers make and how you can easily avoid them:
- Not knowing what’s on your credit report
- Not setting a budget
- Not saving a down payment
- Skipping a preapproval
- Getting just one rate quote
- Ignoring programs like FHA, USDA, and VA loans
- Forgetting about first-time homebuyer programs
- Emptying your bank account
- Applying for a loan or credit card before you close
- Underestimating homeownership costs
1. Not knowing what’s on your credit report
When evaluating your application for a mortgage, lenders look at more than just your credit score.
They also review your credit report to determine what interest rate you’ll receive on a mortgage. If you have errors on your credit report, you could be stuck paying a higher interest rate than you really deserve.
2. Not setting a budget
It can be tempting to start shopping for your first home on Zillow or Trulia right away. But if you don’t have a budget in place, you could end up looking at houses way out of your price range. That can make homes you can afford look disappointing as a result, spoiling your home search.
3. Not saving for a down payment
There are mortgage programs that allow you to put down very little money; there are even 0% down mortgages available.
While these programs can make homeownership a more achievable goal, putting down such a low down payment can be costly, leading to more expensive monthly payments.
4. Skipping a preapproval
When you’re shopping for a home, not getting prequalified for a mortgage is a common error.
A preapproval is a letter from a lender that shows you’re approved for a mortgage loan for a certain amount. Without one, sellers might not take your offer seriously, since there’s no proof you can actually afford the home. That can put you at a significant disadvantage when you find the perfect house.
5. Getting just one rate quote
Some homebuyers only look at one rate quote when shopping for a mortgage, and that’s a costly mistake. If you don’t shop around, you could end up with a much higher interest rate, costing you thousands more over the length of your mortgage.
6. Ignoring programs like FHA, USDA, and VA loans
If you can only afford a small down payment, getting a traditional mortgage can be difficult. Look into programs like FHA loans, USDA loans, and VA loans, so you don’t have to delay buying a home to save a large enough down payment.
7. Forgetting about first-time homebuyer programs
As a first-time homebuyer, you likely don’t have a ton of money in the bank for a down payment and closing costs. If you don’t take advantage of first-time homebuyer programs, you might have to put off your home search.
8. Emptying your bank account
If you find the perfect home, but are short on cash, it might be tempting to raid your emergency fund or borrow from your 401(k) to get the money you need. However, doing so is incredibly risky, leaving you with little money to handle unexpected expenses and hurting your retirement fund.
9. Applying for a loan or credit card before you close
After your offer is approved, it can take several weeks until you reach your closing date. It might be tempting to open up a new credit card or take out a personal loan to pay for expenses like moving costs or new home appliances, but doing so can cost you.
Mortgage lenders want to see that your credit is stable; any new credit accounts you open could change the terms of your mortgage, resulting in a higher interest rate or more fees.
10. Underestimating homeownership costs
Buying a home is expensive, but your mortgage payment is only part of the picture. You’ll also have to pay homeowners insurance, mortgage insurance, property taxes, utility bills, homeowners association fees, and maintenance costs. Neglecting to account for these expenses could leave you struggling to make ends meet.
Buying your first home
Shopping for a house as a first-time homebuyer can be overwhelming. However, by doing your homework and understanding these common mistakes, you can take out a home loan like a seasoned veteran and save money during the homebuying process.