First-Time Homebuyer Mistakes to Avoid

Purchasing your first home is an exciting process. You can find the right place for you and make it your own.

Because buying a home is likely one of the biggest financial decisions you make, you should understand the process to get the best results. The following are mistakes to avoid as a first-time homebuyer.

Not Shopping Around for a Mortgage Lender

Compare mortgage offers to get a good deal on the interest rate and closing costs:

• Mortgage rates and fees can vary by lender.

• Focus on the upfront fees each lender charges.

• Getting multiple interest rates can lower your monthly mortgage payment.

• A fraction of a difference on your mortgage rate can mean tens of thousands of dollars in interest over a 30-year loan.

• Knowing you did your best to reduce costs provides peace of mind.

House Hunting Before Getting Preapproved for a Mortgage

Get preapproved with a mortgage lender before you start looking at homes. You will know how much home you can afford and be able to submit an offer when the time comes.

Preapproval requires a credit check and documentation verifying your income, assets, and debts, such as bank statements, pay stubs, and tax returns. When you get preapproved, you can lock in your interest rate to understand the costs.

Assuming You Need a 20% Down Payment

A 20% down payment eliminates the need for private mortgage insurance (PMI), which protects the lender in the case of loan default. However, many first-time homebuyers cannot or do not want to put down that much money, and most loan products do not require it.

The down payment amount that is best for you depends on the following:

• The type of loan selected

• Your credit score

• The interest rate

• How long you plan to stay in the home

Conventional loans and Federal Housing Authority (FHA) loans are common for first-time homebuyers. The down payment on a conventional loan can be as little as 3%, and as low as 3.5% for an FHA loan.

Co-ops, condominiums, and other properties might require a larger down payment. Check with your real estate agent about the requirements and budget accordingly.

Trying to Time the Market

Although you do not want to purchase a home at the top of the market, you need to put in an offer when it is logical for you. Although you cannot control the economic data that controls mortgage rates, you can control the following:

• Your credit score

• Paying your bills on time

• Managing your debt

• The amount of your down payment

• Shopping for a loan

Making Decisions Based on Emotion

Although you have dreams for your home, avoid letting them cloud your judgment when it comes to practicality, your budget, and your long-term goals:

• Emotional purchases rarely work out well.

• Your first home lets you enter the world of homeownership.

• You must balance your emotions and the financial realities of purchasing a home to avoid getting in over your head.

Buying a Home Outside Your Budget

Avoid overextending yourself with high home prices and mortgage rates:

• The mortgage amount you are preapproved for does not factor in the cost of living.

• A monthly mortgage payment that makes you uncomfortable on closing day will hurt more in the future.

• Repairs, renovations, insurance, and property taxes add up.

• Unexpected expenses will arise and must be covered.

Making Big Purchases Before Closing

Although you might need to purchase furniture or other big-ticket items, avoid applying for new credit or increasing your debt before closing on your home:

• New debt can slow the loan process, lower the amount you qualify for, and potentially increase your interest rate.

• New debt can increase your DTI ratio above the maximum percentage allowed.

• You could be turned down for a mortgage.

Not Researching Your Loan Options

Many loan officers and real estate agents do not discuss all of the loan options available to first-time homebuyers:

• If you lack good credit, you might have difficulty qualifying for a conventional loan.

• An FHA loan, which has lower minimum credit score requirements and high upfront closing costs, might be promoted when other loans would be more appropriate.

• An FHA loan’s slightly lower interest rates do not compensate for the upfront fees.

• A Veteran Assistance (VA) loan is available to active-duty and veteran military service members and their spouses.

• A United States Department of Agriculture (USDA) loan can help low- to moderate-income borrowers purchase homes in certain rural areas.

Failure to maintain an Emergency Fund

Draining your savings to gather the largest possible down payment or cover closing costs puts you at risk.:

• You must be prepared to cover the costs of home maintenance, repairs, and emergencies.

• An emergency fund helps cover unexpected home expenses.

• Tying up all your money in your home limits other financial opportunities, such as funding a vacation or retirement.

Missing Out on Homebuyer Assistance Programs

Explore first-time homebuyer assistance programs to see if you qualify:

• These programs are typically offered at the state and local levels.

• Each state’s housing finance authority offers programs that provide down payment and closing cost assistance to qualified buyers.

• Some lenders offer discounts for first-time homebuyers.

• Applying for assistance can slow the purchase process.

• You could leave money on the table if you do not seek assistance.

*This information is for educational purposes only.

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