4 First Time Home Buyer Mistakes

First Time Home Buyer Mistakes, and How to Avoid Them

1. Not figuring out how much house you can afford

Without knowing how much you can afford, you are wasting time. You could end up looking at houses that are over budget, or visiting homes that are below your optimal price level.

For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won’t keep them up at night. 

How to avoid this mistake: Use a mortgage affordability calculator, and get preapproved to help you know what price range is affordable, what’s a stretch and what’s aggressive.

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2. Not looking for first-time home buyer programs

As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs. But don’t make the error of assuming that you have to delay home-ownership while saving for a huge down payment. There are plenty of low-down-payment loan programs out there, including state programs that offer down payment assistance and competitive mortgage rates for first-time home buyers.

Yes, 11% of millennial homeowners say they regret not making a bigger down payment. But the vast majority don’t express such a regret.

How to avoid this mistake: Ask a mortgage lender about your first-time home buyer options and look for programs in your state. You might qualify for a U.S. Department of Agriculture loan or one guaranteed by the Department of Veterans Affairs that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.5%, and some conventional loan programs allow down payments as low as 3%.

3. Ignoring VA, USDA and FHA loan programs

A lot of first-time home buyers want to or need to make small down payments. But they don’t always know the details of government programs that make it easy to buy a home with zero or little down.

How to avoid this mistake: Learn about the following loan programs:

• VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. They’re for people who have served in the military. VA loans’ claim to fame is that they allow qualified home buyers to put zero percent down and get 100% financing. Borrowers pay a funding fee in lieu of mortgage insurance.
• USDA loans can be used to buy homes in areas that are designated rural by the U.S. Department of Agriculture. Qualified borrowers can put zero percent down and get 100% financing. You pay a guarantee fee and an annual fee in lieu of mortgage insurance.
• FHA loans allow for down payments as small as 3.5%. What’s more, the Federal Housing Administration can be forgiving of imperfect credit. When you get an FHA loan, you pay mortgage insurance for the life of the mortgage, even after you have more than 20% equity.

4. Applying for credit before the sale is final

One day, you apply for a mortgage. A few weeks later, you close, or finalize, the loan and get the keys to the house. The period between is critical: You want to leave your credit alone as much as possible. It’s a mistake to get a new credit card, buy furniture or appliances on credit, or take out an auto loan before the mortgage closes.

Wait until after closing to open new credit accounts or charge big expenses to your credit cards.

Here’s why: The lender’s mortgage decision is based on your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments. Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio. Neither of those are good

from the mortgage lender’s perspective.

Within about a week of the closing, the lender will check your credit one last time. If your credit score has fallen, or if your debt-to-income ratio has gone up, the lender might change the interest rate or fees on the mortgage. It could cause a delay in your closing, or even result in a canceled mortgage.

How to avoid this mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. It’s OK to have all those things picked out ahead of time; just don’t buy them on credit until after you have the keys in hand.

For More Tips, Check Out Our Buyers Cheat Sheet

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