10 First-Time Homebuyer Financial Mistakes & How to Avoid Them
The decision to purchase a new home is fraught with excitement and apprehension. Because the whole process is new to you if you're buying your first house, chances are you will make some first-time homebuyer mistakes along the way.
While you will certainly make little mistakes, it pays to be informed and avoid large (and costly) ones if you can. For tips on how to avoid some of the biggest blunders, keep reading so you can worry less and enjoy house hunting more!
1. Not Checking Your Credit Score
Your credit score and report are not a surprise you want to have when you start looking for a home. Keep track of your credit score and check your credit for free once per year at annualcreditreport.com.
If you find any errors, make sure you dispute them so you're good to go when it comes time to apply for your mortgage.
2. Not Knowing How Much You Can Afford
If you haven't figured out your housing budget, you could end up falling in love with a home that is way out of your price range.
On the flip side, you might discover that you can afford a nicer home than the ones you've been viewing.
Either way, use a mortgage calculator to find out what an affordable home is for your income and debt level, then set a budget that matches. And don't go over it!
3. Not Making a Large Enough Down Payment
While there are some loans that don't require a down payment, the majority of loans require a down payment of 3% to 20% of the total mortgage amount. For a $200,000 home, this could be anywhere between $6,000 to $40,000.
However, many new homebuyers struggle to afford a large down payment on a home and opt to make the lowest possible down payment they can.
But, the more money you're able to save for a down payment, the smaller your mortgage payments will be each month. If you are able to pay 20% of the mortgage, you will also avoid PMI (private mortgage insurance) fees that increase your monthly payments as well.
For these reasons, a down payment is not something you want to think about at the last minute, so start saving now! And even though it can be tough, it's better to start sooner rather than later, because it usually takes a few years: 3.75 years for millennials, 3.42 for gen X, and 2.75 for baby boomers, on average.
4. Not Looking into First-Time Homebuyers Programs
Many first-time homebuyers don't realize that there are federal and state assistance programs to help them with their down payment. These programs can even help you find competitive rates.
It's worth checking out, even if you end up not qualifying.
Not sure where to start looking for these programs? Elevate Mortgage can help! Or, if you already have a mortgage lender, they may also be able to point you in the right direction.
You might also want to consider other loan types, like a VA loan if you or your spouse are members of the military or a USDA loan if the home you want is in a rural area. Both of these loan types have a 0% down payment requirement, as well as other benefits.
5. Not Keeping Some Money in Savings
First-time homebuyers might be tempted to spend all their savings on the down payment, but this is a major first-time homebuyer mistake.
Owning a home is different than renting. So when you rent and the water heater breaks, you call your landlord. But when it's your home, you are the one who has to replace it—and water heaters are expensive.
Unexpected expenses often crop up when you own your own home, so it pays to have some money tucked away for any repairs or emergencies you may encounter.
6. Not Getting More Than One Quote
As a first-time homebuyer, this point may not even cross your mind, but it's an important one nonetheless because you can save yourself thousands over the life of your loan if you are able to find a lower rate. It's surprising what one percent, or even half a percent, can add up to over the course of 30 years.
If you're worried about lowering your credit score by applying to several places, don't be. As long as you apply to each place within a 45-day time frame, it will only count as one hard inquiry on your credit.
So try to apply to at least three different lenders (and make Elevate one of them!) so you can compare rates and offers.
7. Not Getting Pre-Approved
Many first-time homebuyers skip to this step because it's easy to get caught up in wanting to start looking at homes and dreaming of the life you'll have there.
However, without this step, you might fall in love with a home only to realize later that you can't get approved for a mortgage or approved for enough to make a serious offer on the home you're in love with.
That's why it's always best to get pre-approved, or at least pre-qualified, before you start touring possible homes. Some real estate agents might even require it before they'll agree to work with you.
8. Not Waiting Until the Mortgage Is Finalized
Now that you've been pre-approved and found a home, you're thinking of all the things you'll do to make it yours—like purchasing furniture, lighting, rugs, and everything else that makes a house a home.
Although it's tempting to finance new furniture or open a new credit card to buy some home supplies, hold off until you've closed on your mortgage.
About a week before you close, lenders will pull your credit one more time to see if your debt-to-income (DTI) ratio has gone up or down. If it's changed, they might not approve your loan.
So, while it's perfectly fine to choose some new items for your home, just wait to buy them on credit until after your mortgage is finalized.
9. Not Considering the Cost of a Home Purchase
For first-time homebuyers, closing costs can be an unexpected shock. In order to not be blindsided by them, make sure to add them into your budget early on.
Closing costs usually equal out to around 2–5% of the total mortgage, but you can sometimes negotiate with the seller to pay a portion of the closing costs.
Other costs to be aware of, and prepared for, as a first-time homebuyer include:
- Property taxes
- HOA fees
- Repairs & renovations
- Homeowners insurance
- Monthly bills, including gas, electric, water, cable, internet, etc.
- Flood insurance, which will need to be purchased separately if you live in a flood-prone area
Preparing for these additional expenses is why keeping a solid savings fund is so important for first-time homebuyers.
10. Not Being Flexible with Your Wish List
It's unlikely that your first home will look like something straight off of Pinterest or Instagram, but you should make sure that you like the home you are buying.
If you have to sell a home soon after you've purchased it, it can be very costly, so take time to consider the home that you are getting. Make sure you like the neighborhood and that you take advantage of open houses to learn more about the property.
Enjoy the Process of Finding Your First Home
Being aware of these first-time homebuyer mistakes will help you to prepare for homeownership and avoid many of the costly mistakes made by first-time homebuyers.
If you have any questions about the process, the team at Elevate Mortgage Group can help! We want you to find the mortgage that will work best for you, all while making the process as fun and stress-free as possible.