First-Time Home Buyers’ Mistakes
Roughly a third of all home purchases are made by first-time buyers. They are a prized commodity amongst home buyers as the lack of a chain means they can buy and move quickly. But they are also more prone to making mistakes and these mistakes can impact the buying process, slowing it down and potentially increasing the cost.
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Common Mistakes First-Time Home Buyers Make
If you’re seeking your first ever mortgage to buy your first home, avoid making any of these mistakes to simplify the process and ensure it goes without a hitch.
Don’t assume you can afford a specific house before you’ve done your research and calculated how much you can actually afford. You don’t need to get a preapproval to do this, simply be realistic about how much you earn, how much you can afford, and make sure you factor fees, property taxes, insurance (homeowner’s insurance, private mortgage insurance), moving costs, and homeownership costs into the equation.
It’s not all about your down payment and your monthly payment. There are many more elements of buying a home that you need to consider.
Not Checking their Credit Score
Your credit score can make a massive difference. A good credit score will ensure you’re offered the best mortgage rates and have a little more room to maneuver when it comes to the down payment. A bad credit score could stop you from buying altogether, as lenders want assurance you can afford to meet the minimum payment and that your finances are in good order.
Check your credit score, make sure it’s strong enough to get the mortgage you want and if it’s not, spend some time improving it before applying for a mortgage. Your debt-to-income ratio, which compares your income to your total debt payments, will also be factored into the equation and your loan application may be rejected if it’s not stable.
Making a Small Down Payment
Many homeowners wish they had made a bigger down payment. They berate themselves for buying their home too soon and not taking the time to acquire some additional funds.
A larger down payment can increase your chances of getting favorable mortgage rates. It will also reduce the total interest that you pay and could potentially save you tens of thousands of dollars over the life of the loan.
Ignoring Alternative Loans
Conventional mortgages aren’t the only way to get a home. There are VA loans, FHA loans, and USDA loans, all of which are offered to individuals with minimal down payments and lower credit scores.
They won’t impact the purchase price and you may find yourself paying more interest, but these mortgages can help first-time homebuyers if they’re struggling to meet the requirements set by conventional mortgage lenders.
Skipping Discount Points
If it was a struggle to cover your down payment, discount points can be avoided. However, if you have some extra cash left over after paying all the extra fees, it’s worth considering this additional purchase.
Discount points will help to reduce your interest and allow you to make some big savings by paying more money upfront.
Not Creating an Emergency Fund
While it’s wise to buy discount points, it’s not wise to purchase them if doing so means cleaning out your savings and leaving you destitute. You’ll be one financial mishap away from complete disaster, at which point you could lose the home you’ve worked so hard to buy.
By all means pay a little extra to cover the down payment and ensure all other fees can be paid, but don’t clean yourself out in the process. You may need some money to cover utility bills, fees to a homeowners’ association, repairs, and maintenance. What happens if a washing machine breaks, the roof leaks or the air conditioning shuts down?
Keeping a little money back will ensure you’re covered for these rainy-day scenarios. And if you won’t have any money left after covering the down payment and other fees, then postpone the buying process for now and wait until you have more money saved.
Applying for Credit Before Buying
Every time you apply for a new credit card or loan, your score drops. If you max out a credit card, miss a payment or accumulate lots of credit card debt, your score will drop further. Making these mistakes before getting preapproval can reduce your chances of securing a good rate, making them after applying but before the sale has been finalized, could change the lender’s mind.
It would take a serious mistake for them to drop you completely, but they could increase the interest rate. It can take several weeks for a mortgage to be finalized, with the lender checking your score before agreeing and being finalizing. Make sure you don’t open any new accounts at this time and avoid spending too much on your credit cards.
How do These Mistakes Affect the Process?
These mistakes can cost you time and money when buying your first house. Not doing your homework could lead to you searching for a home that is well out of your budget, potentially wasting several months of shopping. Not creating an emergency fund could cost you after the sale has been finalized and not taking care of your credit report can have serious consequences on your odds of getting a mortgage with a respectable rate.
Take a look at our mortgage guides, speak with your buyer’s agent, and keep a close eye on your credit report to prevent these issues.
Who Qualifies as a First-Time Home Buyer?
It sounds like a stupid question but believe it or not, the criteria for a first-time buyer is not simply someone who has never owned a home before. The U.S. Department of Housing and Urban Development describes a first time buyer as:
- An individual who has not owned a primary residence for a minimum for three years.
- An individual who previously owned a home with a spouse and is not single.
- An individual who owned a residence that was not fixed to a permanent foundation, such as a mobile home.
What are the Advantages of Being a First-Time Buyer?
First time buyers can make life difficult for a lender as they tend to have smaller down payments and limited collateral. However, they can also provide benefits that homeowners simply can’t offer, including the lack of a real estate chain.
A real estate chain can slow down the process of buying a home. The buyer needs to sell what they have before they can buy and the same applies to the person buying their house. There is an endless chain, with buyers relying on sellers and sellers relying on buyers. When you’re buying for the first time, however, that real estate chain has been cut short and you’re not relying on anyone.
That’s why a real estate agent often prioritizes first time buyers and recommends the seller accommodate them. The real estate agent wants a quick and hassle-free sale and they know that a first-time buyer provides this.
Summary: Keep Mistakes Low and Money High
You can reduce mistakes by giving yourself more time to think things over and not letting your heart rule your head.
More time means that more research and thought has gone into the process. It also gives you more time to grow your finances and save the money you need to make this process quicker and easier.
If you have any concerns about the buying process, discuss them with your real estate agent, lender or mortgage broker and don’t be afraid to take your time. There’s no need to rush into things—this is a decision that will affect the rest of your life and one that needs to be taken after careful consideration.