16 Common Blunders Made by First-time Homebuyers

Purchasing your first home can feel like a daunting task. Whether you’re a novice in the housing market or have some experience under your belt, you can navigate potential challenges by grasping the fundamentals of homebuying and being equipped with the right questions. The following pointers can assist you in steering clear of common mistakes made by first-time homebuyers during the process of house hunting, mortgage selection, and settling into your new home.

When venturing into your first home purchase, it’s typical to begin house hunting before seeking a mortgage lender’s assistance. However, in today’s market characterized by limited housing inventory and high buyer demand, this approach can pose challenges.

In such a competitive landscape, securing a mortgage preapproval is essential to have your offer considered seriously. Without it, sellers may be reluctant to entertain offers from buyers whose financing isn’t guaranteed, particularly when they have multiple offers to consider. Unless you can present an all-cash offer, a preapproval strengthens your position and instills confidence in sellers.

Furthermore, upon obtaining preapproval, it’s advisable to consider locking in your interest rate. This proactive step enables you to anticipate costs and alleviate concerns about potential rate fluctuations when making an offer.

Impact on you: Without a lender consultation, you may encounter difficulties if a desirable home enters the market, potentially leading you to explore properties beyond your budget.

What to do instead: Alfredo Arteaga, a loan originator at CommLoan in Newport Beach, California, advises prospective buyers to obtain a fully underwritten preapproval before becoming enamored with a dream home. This demonstrates your readiness as a committed buyer with credible credit and financial qualifications for securing a loan.

Certainly, finding a home that fulfills your wish list and aligns with your needs is important. However, making a decision solely based on a home’s aesthetics may overlook crucial factors, especially if it’s situated in a neighborhood or area that doesn’t suit your lifestyle, warns Alison Bernstein, founder of Starter Ventures in New York City.

According to Bernstein, selecting the right town is pivotal for personal and familial development, as it should resonate with your cultural values and preferences. While you can always modify your home’s features through renovations or upgrades, relocating to a new neighborhood isn’t as straightforward.

Impact on you: You might end up adoring your home but despising the surrounding neighborhood.

What to do instead: Determine your community priorities and conduct thorough research. Consider factors such as school ratings, commute times, and local amenities. Visiting the neighborhood at various times can provide insights into traffic patterns and overall appeal. Remember, the right neighborhood is paramount, as home improvements are more feasible than neighborhood transformations.

Unicorns, both in mythology and real estate, represent the elusive quest for perfection. One of the most common mistakes made by first-time homebuyers is fixating on finding a home that ticks every single box on their wish list. This pursuit of perfection can narrow down your options, causing you to overlook viable starter homes in anticipation of something better coming along. James D’Astice, a real estate broker with Compass in Chicago, advises against letting unrealistic expectations hinder your search.

Impact on you: The pursuit of a dream home might limit your options and could result in missed opportunities or overpaying for a property.

What to do instead: Maintain an open mind regarding available properties and be prepared to invest some effort into renovation projects, suggests Ralph DiBugnara, president of Home Qualified in New York City. He also highlights loan programs that allow you to include repair and renovation costs in your mortgage.

Buying a house marks a significant milestone in life. It’s where memories are made, where you carve out your own space, and establish roots. However, it’s crucial to maintain a balance between emotional attachment and practicality, reminds DiBugnara. While you’re creating a home, you’re also making a substantial financial investment, so it’s essential to stay grounded and focused on your budget and long-term financial objectives.

Impact on you: Emotional decisions may result in overpaying for a property and straining your financial resources.

What to do instead: DiBugnara advises having a budget and adhering to it diligently. Avoid becoming overly attached to a property that exceeds your financial limits.

First-time buyers often make the mistake of securing a mortgage from the first lender or bank they encounter, missing out on potential savings. Failing to compare offers could mean leaving thousands of dollars on the table.

Impact on you: Shopping around allows for a more informed comparison, ensuring you secure the best deal and lowest possible rates.

What to do instead: Consult with at least three different lenders. Aim to gather rate quotes on the same day to account for fluctuating rates. Compare not only rates but also lender fees and loan terms. Additionally, consider factors like customer service and lender responsiveness, as these are integral to a smooth mortgage approval process. Bankrate’s mortgage rate tables offer a comprehensive starting point for comparison shopping.

When you apply for preapproval, your mortgage lender will check your credit report to ensure everything is in order. They will also conduct another credit check just before closing to verify that your financial situation has not changed, including your credit score.

Impact on you: It’s crucial for first-time homebuyers to understand that any new loans or credit accounts appearing on your credit report during this period can jeopardize the closing and final loan approval, often leading to unpleasant surprises.

What to do instead: Avoid making significant financial changes between preapproval and closing. This means refraining from opening new credit cards, closing existing accounts, taking out additional loans, or making large purchases using existing credit. Aim to reduce your existing balances to below 30 percent of your available credit limit, if possible, and ensure timely and full payment of all bills each month.

First-time buyers may find themselves financially constrained in today’s climate of escalating home prices. If you lack substantial savings for a down payment or possess less-than-ideal credit, securing a conventional loan could pose a challenge.

Impact on you: You might feel discouraged, assuming there are no viable financing options available, thereby postponing your home search.

What to do instead: Explore government-insured loan programs such as those offered by the Federal Housing Administration (FHA loans), U.S. Department of Veterans Affairs (VA loans), and U.S. Department of Agriculture (USDA loans). Here’s a concise overview of each:

  • FHA loans necessitate only a 3.5 percent down payment with a minimum 580 credit score. These loans cater to borrowers with less-than-perfect credit or limited savings. However, mandatory mortgage insurance, payable annually and upfront at closing, is a significant drawback.
  • VA loans are exclusively available to eligible active-duty and veteran military service members and their spouses. They do not require a down payment, although some borrowers may incur a funding fee. Private lenders administer VA loans and impose a cap on lender fees to maintain affordability.
  • USDA loans assist moderate- to low-income borrowers in purchasing homes in rural regions. To qualify, you must buy a home in a USDA-eligible area and meet specified income thresholds. Some USDA loans extend no-down-payment options to low-income eligible borrowers.

Purchasing a home involves navigating through various intricacies, especially during mortgage underwriting. According to Nick Bush, a Realtor with Keller Williams Realty in Rockville, Maryland, rushing this process can lead to costly consequences later on. “The biggest mistake that I see is to not plan far enough ahead for the purchase,” Bush emphasizes.

Impact on you: Hastening the process may result in insufficient savings for a down payment and closing costs. Moreover, rushing toward closing might prevent you from addressing issues on your credit report, thereby hindering your ability to secure more favorable loan terms.

What to do instead: Develop a comprehensive homebuying timeline at least a year in advance. Be mindful that repairing poor credit and accumulating adequate funds for a down payment can take months, if not years. Focus on enhancing your credit score, reducing debt, and bolstering your savings to strengthen your chances of obtaining preapproval.

For first-time homebuyers, it’s tempting to be drawn to homes that may push the limits of their budget, but exceeding those limits is never advisable. Especially with soaring home prices, adhering closely to your budget becomes crucial.

Impact on you: Purchasing a home beyond your means increases the risk of foreclosure if you encounter financial hardships. It also leaves less room in your monthly budget for other essential expenses. Being “house poor” can hinder opportunities like saving for retirement, a child’s education, or a vacation.

What to do instead: Concentrate on the monthly payment you can comfortably afford rather than solely focusing on the maximum loan amount you qualify for. Just because you qualify for a $300,000 loan doesn’t mean the associated monthly payments are manageable. Consider your entire financial situation when determining your affordable housing budget.

Ed Conarchy, a mortgage planner and investment adviser at Cherry Creek Mortgage in Gurnee, Illinois, warns that one of the biggest mistakes first-time homebuyers make is using up all or most of their savings for the down payment and closing costs. “Some people scrape all their money together to make the 20 percent down payment so they don’t have to pay for mortgage insurance, but they are picking the wrong poison because they are left with no savings at all,” says Conarchy.

Impact on you: While putting down 20 percent or more avoids private mortgage insurance (PMI) with a conventional mortgage, it can leave you without any emergency funds. Living without a financial safety net is risky, even with the monthly mortgage payment savings.

What to do instead: Strive to maintain an emergency fund equivalent to three to six months of living expenses even after closing. While avoiding PMI is desirable, depleting your emergency or retirement savings for a hefty down payment is a risk that’s better to avoid. Furthermore, you can eliminate PMI on a conventional loan once you reach 80 percent equity in your home.

The notion that a 20 percent down payment is mandatory is often a misconception. While such a down payment helps avoid mortgage insurance, many modern buyers either cannot or prefer not to put down that much money. In reality, the average down payment for first-time homebuyers in 2022 was 8 percent, as per the National Association of Realtors. However, certain communities like co-ops or condos might necessitate a larger down payment, so consulting your real estate agent about specific community requirements is advisable.

Impact on you: Waiting to save up 20 percent could take years, potentially hindering progress towards other financial goals such as beefing up retirement savings, bolstering emergency funds, or reducing high-interest debt.

What to do instead: Explore alternative mortgage options. Conventional mortgages can accept as little as a 3 percent down payment, while FHA loans only require 3.5 percent down with a credit score of 580 or higher. Some other loan types might even offer mortgages with no down payment required.

Numerous programs exist to aid first-time homebuyers, ranging from local government or community initiatives providing loans with favorable terms to grants offering cash for down payments. Certain lenders also extend discounted rates specifically to first-time buyers.

Impact on you: Failure to investigate these potential cost-saving programs could result in paying a larger down payment than necessary or overlooking loans with beneficial terms.

What to do instead: Visit the websites of your local, state, and federal housing authorities to explore the array of loans and grants accessible to first-time homebuyers.

Numerous loan programs permit you to utilize a gift from various sources, like family, friends, employers, or charities, toward your down payment. However, failing to clarify who will provide this assistance and when it will be available can disrupt the loan approval process.

Impact on you: “Before beginning your home search, it’s crucial to ensure that any potential contributors, such as the Bank of Mom and Dad, are prepared to provide the promised assistance,” advises Dana Scanlon, a Realtor with Keller Williams Capital Properties in Bethesda, Maryland. “If a buyer enters into a contract to purchase a home with the expectation of receiving gift funds, and these funds fail to materialize, they risk losing their earnest money deposit.”

What to do instead: Engage in an open conversation with individuals offering financial support for your down payment to clarify the amount and timing of the gift. Retain documentation such as a copy of the check or electronic transfer, demonstrating the transfer of funds from the donor to you. Lenders typically require verification through bank statements and a signed gift letter.

Many individuals entering the housing market for the first time may not be acquainted with the notion of homebuyer rebates, also referred to as commission rebates. According to Ben Mizes, co-founder and president of Clever Real Estate in St. Louis, these rebates can amount to as much as 1 percent of the home’s sales price and are deducted from the buyer agent’s commission.

Impact on you: While homebuyer rebates are accessible in most states across the U.S., there are exceptions. Presently, eight states prohibit homebuyer rebates: Alabama (with certain restrictions), Alaska, Kansas, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee.

What to do instead: If you reside in a state where homebuyer rebates are permitted, consider inquiring whether your agent is open to offering one at the time of closing. On a $300,000 home purchase, this rebate could translate into a $3,000 savings for you.

When purchasing your first home, it’s essential to ensure you retain some savings. Moving expenses, whether you’re renting a truck, hiring movers, purchasing packing materials, or arranging storage, can quickly accumulate, even if you’re managing the move independently.

Additionally, you may have plans for significant renovations or repairs to the house before settling in. It’s crucial to budget for these expenses when purchasing a home.

Impact on you: Neglecting to account for moving costs, including even the purchase of packing supplies, can leave you in a financially tight spot. Moreover, failing to allocate funds for minor renovations or updates can impact the livability of your new residence.

What to do instead: Familiarize yourself with the upfront costs associated with moving and factor in a buffer. If you intend to undertake renovations or repairs, meticulously estimate the expenses, encompassing everything from building materials and supplies to labor costs. Obtain multiple quotes from contractors in advance to facilitate better financial planning.

One crucial lesson for first-time homebuyers is understanding that homeownership entails more expenses than just the mortgage payment. Beyond the initial sticker shock of the principal and interest, there’s a multitude of additional costs to consider. Property taxes, homeowners or hazard insurance, utilities, and ongoing maintenance and upkeep are all part of the financial picture for new homeowners.

How this affects you: These additional expenses can accumulate to thousands of dollars annually. Without sufficient cushion in your monthly budget or a healthy emergency fund, you may find yourself struggling to cover these costs.

What to do instead: Seek guidance from your real estate agent or lender to calculate estimated taxes, insurance, and utility expenses. Compare insurance quotes to ensure you’re getting the best deal. Lastly, aim to set aside 1 to 3 percent of the home’s purchase price each year for repairs and maintenance to avoid financial strain.

With awareness of the pitfalls to sidestep in the homebuying process, you can begin taking strides toward a successful purchase. For further guidance tailored to newcomers, delve into our comprehensive first-time homebuyer guide. Additionally, explore the criteria for qualifying as a first-time homebuyer; you might be pleasantly surprised to find that you qualify for the associated benefits, even if you’ve owned a home before.