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Biggest first-time homebuyer mistakes (and how to avoid these!!!)

Buying a house for the first time is exciting, yet overwhelming and intimidating. And if you don’t know a lot about the process, you might make a few first-time homebuyer mistakes. 

But while mistakes are common when navigating new waters, the ones you make as a first-time homebuyer can be costly. So here’s a look at seven common first-time homebuyer mistakes to avoid. 

1. Not educating yourself

You don’t need to be an expert on every loan program before purchasing a home, but it’s crucial not to approach a mortgage lender completely in the dark. Doing so risks overwhelming yourself with information.

Even if buying a house is still a few years away, take the initiative now to familiarize yourself with different types of home loans. This early preparation allows you to understand credit score and down payment requirements, aiding in financial readiness.

Moreover, research the necessary documents for the application process and organize them in advance. For self-employed individuals, be aware of the specific requirements applicable to your situation.

Most importantly, check your credit report well in advance, ideally a year beforehand. Your credit score might not be as high as you assume, but early detection allows time for improvement.

2. Shopping for a house before getting pre-approved

While it’s not mandatory to obtain pre-approval before embarking on your home search, doing so can be immensely advantageous. Without pre-approval, you’re left in the dark regarding your purchasing capacity and whether you meet the necessary qualifications. On the contrary, securing pre-approval can alleviate much of the uncertainty.

Knowing exactly how much you can spend helps you steer clear of the heartbreak of falling for a home outside your financial reach. Moreover, a pre-approval demonstrates to sellers and real estate agents that you’re a serious contender in the market, bolstering their confidence in your offer.

It’s important to grasp the distinction between pre-qualification and pre-approval. While these terms are often used interchangeably, they carry different weights in the homebuying process.

Pre-qualification involves completing a straightforward online form and providing basic information about your credit score and income. However, this information isn’t verified by the lender. Based solely on the details you provide, the lender estimates the amount you might be able to borrow.

On the other hand, pre-approval goes a step further. It entails the lender meticulously verifying your income, employment status, outstanding debts, and other assets.

3. Not comparing mortgage lenders

Mortgage rates vary from lender to lender, so it’s important to get multiple quotes from different lenders, 

Not only do interest rates vary, but also lender fees. And the amount a lender charges can greatly affect your closing costs. Ideally you should rate shop within a 14 to 45-day window (preferably within 14 days). You can contact your personal bank, credit unions, online banks, and mortgage companies. As a general rule of thumb, aim for at least three mortgage quotes.

Now, you might have some concerns about multiple inquiries. The good news, though, is that credit scoring models are designed to recognize rate shopping behavior. So “multiple similar” inquiries will only appear as one on your report – when they take place within a window of time.

4. Forgetting about closing costs

Most homebuyers know they’ll need a down payment, as most mortgage programs require one. But this isn’t the only cost you’re responsible for paying. Buying a house also involves closing costs, which are lender and third-party fees.  

A lot of mortgage programs require a minimum 3% to 5% down, with closing costs ranging an additional 2% to 5% of the loan amount, according to Zillow. 

Fortunately, there are different ways to deal with this extra expense. You can ask about closing costs assistance, where the lender gives a credit toward your closing costs, if you agree to a slightly higher interest rate. 

If you have enough home equity, you can wrap closing costs into your mortgage loan. Additionally, some programs allow sellers to contribute to a buyer’s closing.

5. Buying too much house

Being house poor isn’t fun, yet a lot of people find themselves in this situation. 

This refers to spending so much of your income on the mortgage payment that you have nothing (or very little) left for anything else. This is another common first-time homebuyer mistakes because it involves buying at the top of your budget. 

Rule of thumb: Just because you’re pre-approved for an amount doesn’t mean you can actually afford to spend that much.

And yes, I know that sounds confusing. 

However, when a lender determines your pre-approval number they often only use income and debt payments listed on your credit report.

But like many people, you probably have monthly expenses that don’t appear on your credit report. For example, your mortgage lender might not know how much you pay for insurance or food each month. And if you’re spending a lot in these areas, you’ll probably need to spend less on the housing side.

Therefore, be realistic and honest about your affordability. To play it safe, spend less than your pre-approval amount if possible. You won’t regret this. 

The less money you spend on a house payment, the more cash you’ll have to save, enjoy experiences, or pay off debt.

6. Emptying your savings to buy a house

Yes, your down payment and closing costs can eat at your savings. Even so, it’s smart to leave some cash in savings after buying a house.

There’s really no magic number, but you should never have zero funds left in the bank.

Now, ideally your down payment fund should be separate from your emergency fund. Realistically, though, you might not be able to save a separate fund.

In this case, keep at least three or four month’s worth of mortgage payments in the bank after closing. Just in case you’re thrown a financial curve ball shortly after closing. 

7. Applying for new credit *before* closing

Understand that different factors influence a lender’s decision to approve you, with two big factors being your credit score and your debt-to-income (DTI) ratio. If you’re not familiar with DTI, this is the percent of your monthly gross income that goes toward debt repayment.

Getting new credit can affect both. And if your credit score drops or your DTI increases, you could potentially jeopardize your mortgage approval. So don’t finance anything and don’t get into additional debt until after closing. 

If something happens – maybe your car dies and you need another one – talk to your lender first to make sure it’s okay to take on a new expense.