Searching for and finding your first home is an exciting process, but because the experience is brand new, it’s easy for buyers to make missteps. From underestimating your monthly payments to locking in a higher-than-necessary interest rate, the following errors are common.
The good news is that they’re also avoidable. When you’re ready to buy, these tips will help you successfully navigate the real estate market.
Mistake #1: Assuming you need a 20% deposit. Putting down 20% of the cost of a home may seem standard, but in most cases, it’s not actually necessary. Zillow reports that when it comes to first-time homebuyers, only 37% put down 20%. A deposit between 3% and 9% is much more common. And keep in mind that waiting until you’ve saved up a 20% down payment can take years and limit your cash flow for other things like retirement savings.
How to fix it: Many conventional loans only require a 3% down payment, and some programs, such as VA and USDA loans, don’t require a deposit at all. Additionally, depending on your situation, you may qualify for down payment assistance programs. Researching various loan types and programs can get you in a home sooner and save you money — win-win.
Mistake #2: Putting off looking at mortgages. Touring homes and attending open houses is the fun part. Filling out paperwork, not so much. But if you don’t get pre-approved for a mortgage you could be setting yourself up for disappointment, especially if you stumble upon your perfect home. Without a letter from a lender, sellers might not consider you a serious buyer. Plus, you could be setting your sights on homes outside your price range.
How to fix it: Before you start dreaming about beds, baths, and backyards, get pre-approved or pre-qualified by a lender. And keep in mind, you don’t have to go with the lender who pre-qualifies you; you can shop around for rates before you lock them in.
Mistake #3: Allowing credit issues to linger. If your credit is sub-par, it’s key to plan in advance as it can take time to pay down debt and improve your credit score. It’s also crucial to scrutinize your report for any errors — even one mistake can affect your interest rate.
How to fix it: Request a copy of your credit report before you apply for pre-approval and make sure it looks correct. And since lenders will pull your report twice (at pre-approval and again before closing), don’t open new credit cards, close existing accounts, or apply for new loans (like a car or student loan) during the interim, as these things could affect your final interest rate.
Mistake #4: Underestimating the costs of homeownership. There are plenty of mortgage calculators available online, but they may not give you a true picture of how much money you’ll need to own a home.
How to fix it: As you prepare your budget, make sure you account for all the various expenses. Some common line items include property taxes, private mortgage insurance (if you put down less than a 20% deposit), homeowner’s insurance, HOA fees (for condo owners), lawn care, and general maintenance and repairs. These items can add up, so do your research to make sure you’re looking at homes within your budget range.
Mistake #5: Not shopping around for the best interest rate. Studies have shown that over half of homebuyers only get one rate quote, but going with the first rate you get could cost you.
How to fix it: Ask for quotes from at least three different lenders and then compare rates, fees, and loan terms. Beyond the numbers, you may also want to consider how responsive the lender is to your needs and whether they’re a big chain or a local business.