Buying your first home can be an exciting and nerve-wracking experience. While many first-time homebuyers are well prepared for this major purchase, they may also make mistakes in the mortgage and homebuying processes.
For example, some buyers may visit houses or start making offers before fully understanding their financial situation. You'll want to make sure your credit history and credit score, debt-to-income ratio,and overall financial picture will qualify you for a mortgage before you shop.
Here are some of the most common mistakes that first-time homebuyers may make in the buying process and how to avoid them.
Key Takeaways
- Ensure your credit is in good shape to get the best interest rates and terms.
- Credit issues to address include a history of late payments, debt collection actions, or significant debt.
- Boost your score by paying bills on time, making more than the minimum monthly payments on debts,and not maxing out your available credit.
- Get a pre-approval letter from a lender so a seller will be more likely to consider your offer.
- Apply for a mortgage with a few lenders to understand what you can afford and to get the best terms.
1. Not Keeping Tabs on Your Credit
If you or your spouse have credit issues—such as a history of late payments, debt collection actions, or significant debt—mortgage lenders might not offer you their best terms, or they may decline your application. If your score is below 620, you may have trouble getting approved for a conventional mortgage.
To tackle potential problems in advance, check your credit report before you start the homebuying process. You can request your credit report from each of the three credit reporting agencies (Transunion, Equifax, and Experian) through AnnualCreditReport.com.
Look for errorsand dispute any mistakes in writing with the reporting agency and creditor, including and provide documentation to help make your case. For additional proactive help, consider using one of the best credit monitoring services.
Negative items such as late payments or delinquent accounts can stay on your credit report for up to seven to 10 years. But you can boost your score by paying your bills on time, making more than the minimum monthly payments on debts,and not maxing out your available credit.
Note
To qualify for an FHA loan, you’ll need a minimum credit score of 580 to use the program’s maximum financing (3.5%down payment). If you have a credit score between 500 and 579, a 10% down payment is required.
2. Not Taking Time to Prepare
Before you apply for a mortgage, you'll want to have all your documents and financial information organized so that you can get through the complicated buying process more easily. Buying a home is a long process, and being prepared can reduce hassles.
Before shopping for a home and applying for a mortgage, gather all your financial documents you will likely need for the application process. These can include your W-2 forms, tax returns, pay stubs, or bank statements. Ensure you have enough money for a down payment and for closing costs.
3. Ignoring the Neighborhood
Many first-time homebuyers are so focused on finding a house that fits their criteria that they forget to consider the pros and cons of the broader neighborhood.
Consider the factors about a community that are important to you such as walkability, low crime rates, or highly ranked schools. Perhaps you want a community that is within a short commute to your work. If you focus only on a home's qualities, you may end up in a neighborhood that you don't like.
4. Expecting to Find a Perfect Home
If you have a list of criteria for your dream home, don't make the mistake of thinking you will find a home that checks every box. Most likely, you will find homes that meet most, but not all, of your standards.
When you expect to find the perfect home, you could prolong the homebuying process by holding out for something better. Or you could end up paying more for a home just because it meets all your needs.
Instead of being strict with all your criteria, identify some home features you can be more flexible with and keep an open mind while homebuying. That way, you won't pass up a great property just because it isn't perfect.
5. Relying on Emotions
Buying a home can be an emotional process, full of hope, expectation, and frustrations. When you are buying a home, make sure that the financial decisions you make are not based on your emotions. If you get excited about a home, make sure you don't buy a home just because it makes you happy. You'll need to ensure you can afford the payments in your monthly budget.
Similarly, avoid buying a home based on desperation. If you've been shopping for a while and have not found a home that fits your budget and general criteria, you may feel an impulse to buy a home that is not up to par. Instead, practice patience and find a home that you can afford and that reasonably meets your expectations.
6. Not Factoring in Maintenance Costs
When you buy a home, you'll likely have to pay more than the mortgage amount each month, but many first-time homebuyers don't consider these other expenses. When you plan to buy a home, factor in potential maintenance costs, such as replacing aging appliances like water heaters or washers and dryers.
Older homes may require more maintenance that can be expensive such as repairing a foundation or replacing a roof. It's especially important to factor in repair costs if you are buying a "fixer-upper." Factoring in potential maintenance expenses can help you buy a home that fits your budget.
7. Overlooking Government-Backed Loan Programs
First-time homebuyers who are tight on cash can often get down payment assistance through mortgages that are government-backed, such as through FHA loans, VA loans, or USDA loans. In some cases, you may not have to put down a down payment or you may need a down payment of only 3.5%.
A government-backed loan may also offer other lower requirements for qualifying and can offer competitive interest rates. Taking advantage of the potential better terms you can get with a government-backed loan program could help you buy a home sooner.
Note
Using a government-backed loan program could save you money in the long-term as well as save you money in a down payment, which can help with your immediate budget.
8. Searching for Homes Before Getting Pre-Approved
In hot housing markets, you may be up against multiple bids and stiff competition. In these cases, sellers are usually less likely to consider offers from buyers who don’t have a pre-approval letter from a lender.
A pre-approval letter lists the loan amount for which you qualify, your interest rate and loan program, and your estimated down payment amount. It shows a seller that the lender believes you have the can repay your bills, based on your credit history and score, income and employment history, financial assets, and other key factors. The pre-approval letter also includes an expiration date, usually within 90 days.
9. Not Shopping Around for a Mortgage
When you shop around for a mortgage, you can save money. Applying for a mortgage with a few different lenders gives you a better sense of what you can afford. You can compare the best mortgage products, interest rates, closing costs, and lender fees. Shopping for a mortgage also helps you negotiate with lenders.
As you compare offerings, pay attention to fees and closing costs, which can add to your total costs. Even small differences in interest rates can add up to significant differences over time.
Keep in mind that some lenders will offer you discount “points,” a way to buy down your interest rate upfront. This increases your closing costs. And other lenders that promote low or no closing costs tend to charge higher interest rates to make up the difference. Closing costs vary widely among lenders but often range from about 3% to 6% of the loan amount.
In addition to checking with your bank or credit union, you can ask a mortgage broker to shop rates on your behalf. Mortgage brokers aren’t lenders. They act as a matchmaker between you and lenders in their network. They can save you time and money by comparing multiple lenders who have products that fit your needs.
You may want to also research offerings from direct lenders, either online or in-person. You can use a mortgage calculator to estimate and budget some of the costs.
By applying for a mortgage with several lenders, you’ll receive loan estimates to compare rates and closing costs. Also, if you do most of your rate shopping within 30 days, the multiple credit checks lenders perform will count as one hard inquiry and are unlikely to lower your credit score.
10. Buying a More Expensive House Than You Can Afford
When a lender qualifies you for a certain amount for a mortgages, you don't have to accept the full amount. Sometimes, a lender may approve you for more than you can actually afford. Make sure your monthly payments will fit into your budget. If you can't repay your loan according to the terms, you risk losing your house to foreclosure.
Your home budget will also need to include maintenance expenses, repairs, insurance, property taxes, homeowner’s association fees (if applicable), and other costs.
11. Not Hiring a Real Estate Agent
Searching for a home on your own can be time-consuming and complicated. A professional real estate agent can help both with finding a property and in the negotiation process with sellers.
Also, if you go to showings without your own real estate agent, a seller’s agent might offer to represent you. In that case, the agent may not have your interests in mind as their goal would be to get the highest and best offer for the seller. Having your own agent whose interests are more aligned with yours will help you make more informed choices.
Some states require a real estate attorney to handle the transaction, but attorneys won’t help you search for a home. Attorneys help you draft an offer, negotiate the purchase agreement, and act as a closing agent.
12. Opening (or Closing) Lines of Credit
You can still be denied a mortgage even after being pre-approved for one. Mortgage lenders check your credit during pre-approval—and again just before closing—before giving you the final approval.
Aim to maintain the status quo in your credit and finances before closing. That means not opening new lines of credit or closing existing lines of credit, which can lower your credit score and increase your debt-to-income ratio and potentially cause a lender to deny your loan.
Instead, wait until after you’ve closed on your home to take out new lines of credit (like a car loan or a new credit card) or close any credit accounts.
13. Making Big Purchases on Credit
Spending more on your credit accounts can negatively impact your credit score and debt-to-income ratio. Keep your credit and finances stable until you close on your home. Try to use cash for major purchases, or delay them until after closing.
Consider waiting to make a major purchase until a few months after buying a home when you better understand your new monthly budget.
14. Moving Money Around
In mortgage underwriting, large movements of money can be a red flag. Avoid making large deposits or withdrawals from your bank accounts or other assets. If lenders suddenly see unsourced money coming in or going out, it might look like you got a loan, which would impact your debt-to-income ratio.
Lenders aren’t worried about transparent deposits, such as a bonus from your employer or your IRS tax refund. But if a friend wires you money or you receive business income in your personal account, a lender may demand proof to verify that the deposit isn’t a loan.Expect a lender to ask for a bill of sale (if the deposit is from something you sold), a canceled check, or a pay stub.
Note
You can use a gift from a relative or friend toward your down payment. However, many loan products require a gift letter and documentation to source the deposit and verify that the donor isn’t expecting repayment.
15. Changing Jobs
Changing jobs can complicate your mortgage approval. A lender wants to ensure you have stable income and employment, and that you can afford to repay your mortgage. If you were pre-approved for a mortgage based on a certain income and job, any chances in the interim before closing can be a red flag and delay your closing.
For approval, you generally must provide proof of two consecutive years of steady employment and income. When you change jobs, that continuous record of income and employment is disrupted.
Also, if 25%or more of your salary is in commissions, lenders want to see that you’ve earned that income over two straight years. Whenever possible, wait to switch jobs until after your loan closes. Otherwise, communicate with your lender about the change immediately.
16. Skipping the Home Inspection
Waiving a home inspection can be a costly mistake. Home inspections are intended to protect the buyer and can find major issues with a home that could be costly.
If you skip an inspection, you will have no recourse if a major issue, such as cracked pipes or water damage, surfaces after you close. That means you might be footing the entire bill to fix those issues.
When you make an offer on a home, you can include a home inspection contingency that gives you a penalty-free exit from the deal if a major issue is uncovered and the seller is unwilling to fix it before closing.
With that contingency in place, you can withdraw your offer and usually get your full earnest money deposit refunded. The home inspection fee is non-refundable and typically paid by the buyer to the home inspector up-front. It typically ranges from $300 to $500, depending on location and the size of the property. Meanwhile, the potential costs of having to replace a furnace, water heater, roof, or other big-ticket items could be thousands of dollars.
Note
You might consider additional inspections, such as a pest inspection, mold or radon inspection, or a sewer scope, for example, if your lender requests it.
17. Not Comparing the Loan Estimate to the Closing Disclosure
Your lender is required by law to provide you with the closing disclosure three business days prior to your closing date. This document lists the exact costs you’re expected to pay at closing, including your down payment, closing costs, loan details and terms, and other important information. It’s a five-page document. Take the time to compare it against the initial loan estimate you received to make sure you aren’t being charged extra fees (called junk fees) by your lender or other parties involved in the transaction.
Also, if certain fees increase more than expected, ask your lender to explain why. Make sure basic details, such as your name and other identifying information, are listed correctly so you don’t run into paperwork issues on the closing day.
If you find errors or questionable or unexplained extra fees, tell your lender immediately so those issues can be addressed. In some cases, your closing might have to be delayed to ensure the paperwork is corrected and updated, and all issues are resolved.
How Can You Get a Copy of Your Credit Report?
You can request a copy of your credit report from each of the major credit reporting bureaus: Experian, Equifax, and TransUnion. You can also request a report from these agencies through AnnualCreditReport.com. By law, you're entitled to one free copy of your credit report each year. Review your credit report to identify any areas you need to improve before applying for a mortgage.
What Is an Inspection Contingency?
A home inspection contingency, or a due diligence contingency, is a clause in a homebuying contract that gives the buyer the right to inspect a property within a certain amount of time. If the inspector identifies issues, the buyer can negotiate with the seller for repairs or decline to buy the home.
Can a Pre-Approval Letter Affect My Credit Score?
A pre-approval letter from a lender, unlike a prequalification, requires that the lender do a hard credit check on you financial history. As a result, getting a pre-approval letter can affect negatively affect your credit score, although the impact is temporary and minimal.
The Bottom Line
Making a mistake during the homebuying process can delay the process, create more hassles and cost you money.
When it comes time to buy your first home, being well-read and educated about the lending and real estate process can help you avoid some of these mistakes. Consider relaying on real estate and financial professional to help guide you through what's best for your situation.
