Top 7 Mistakes First Time Home Buyers Make

1. Not checking your credit score

One of the biggest mistakes you can make when you are looking for a new home is to start browsing properties without any idea of your credit score. Before you hop on Zillow, before you go to an open house, before you even get pre-qualified for a loan, you need to know your credit score.

Your credit score typically needs to fall into a specific range in order for you to qualify for specific loans. If you do not have an accurate idea of your credit score, you will not know which loans will work best for your specific needs. 

**IMPORTANT**

Lender requirements are consistently updated due to stricter qualifying regulations, be sure to connect with a preferred lender for the most current qualifying standards. 

Here are the three main types of loans and the minimum credit score you will need to have in order to qualify for each of them:

• VA loans: If you have served in the military or you are currently active in the military, you qualify for 0% down. The minimum credit score you will need to qualify for this loan is going to be between 580-620.

• FHA loans: Federal Housing Administration (FHA) loans are another government-backed loan that some homebuyers can get depending on their credit score. Note, this is different than the first-time homebuyer loans that are available. These loans are good for those with a low credit score or a high debt to income ratio. The minimum downpayment is 3.5%, the minimum credit score is 620, and the acceptable debt to income ratio is a forgiving 55%.

• Conventional loans: This non-government backed loan type requires a minimum credit score in the range of 620-640. The minimum downpayment can be as low as 3%, but you should aim for a downpayment closer to 5% so that you can get a better interest rate with this loan.

Due to COVID-19, these three loan types now have slightly stricter regulations and requirements than they typically would. As of summer 2020, VA and FHA loans require a minimum credit score of 620, and conventional loans require a minimum credit score in the range of 620-660. To qualify for a conventional loan with a credit score of 620 in the summer of 2020, you would have to put at least 20% down.

If you do not know your credit score before you start looking for homes, you could easily fall in love with a house that you will not be able to afford or attempt to get a loan you are not qualified to receive, so it is crucial that you figure out your credit score prior to making any other home-buying decisions.

Checking your credit score

In today’s modern society, it is easier than ever to simply hop online or pull out a smartphone and look up your credit score, and options like Credit Karma make it simple for you to check your credit score for free.

Whether you want to use Credit Karma (which uses TransUnion and Equifax) or work directly with these three credit bureaus: TransUnion, Experian, or Equifax, it is essential that you are aware of your credit score before you start looking for homes.

You will want to check with all three credit bureaus because they will not always pull the same information when calculating your credit score. When you use all three bureaus, you will have a more accurate picture of your credit score when you get ready to tackle the home buying process.

Checking your credit score before you make any purchasing decisions will help make the home buying process much easier, both for you and your lender.

2. Not getting pre-qualified

The second biggest mistake that many first time home buyers make is not getting pre-qualified before they start looking at or making an offer on different properties.

Imagine finding the perfect house in the perfect neighborhood with the perfect school district, only to find out that it is out of your price range. How about finding that incredible home only to be beaten out by someone who was already pre-qualified? Disappointing right? 

You can avoid this feeling by getting pre-qualified ahead of time and only looking at homes that fall within your budget.

Sit down with your lender, go over all of your finances, and figure out exactly what you qualify for before you even consider looking at any homes. This is the best way to avoid frustration and disappointment when you are looking for your first home.

3. Not shopping your interest rate

When you try to get car insurance or you are looking for the best credit card, you never just go for the first option available. You shop around until you find the best rates.

This is exactly what you need to do when you are working with potential lenders. Before you put an offer on a home, you want to talk to different lenders and see which lender will give you the best possible interest rate.

It’s important to shop your interest rate because it will make a huge difference when it comes to your monthly mortgage payment and your savings over the year. A little extra time shopping around can save you a lot of money over time.

4. Buying more than you can afford

While this might seem like a no-brainer, a lot of first time home buyers make this major mistake. Your pre-qualification will let you know how much you qualify for when you get your loan, however just because you have a certain pre-qualification amount does not automatically mean that you should look for homes at the high end of this range.

Make sure you budget for your other monthly expenses as well so that you can make sure that your mortgage payments actually fit into your monthly budget.

5. Believing you have to put 20% down to purchase a home

Contrary to popular belief, you do not need a 20% downpayment to purchase a home. Consider what that down-payment would be if you were looking at a $300,000 home. 60,000! That’s a lot of money, and it does not even factor in the additional 3-5% that you would have to pay in closing costs. 

While there are definitely some people who have that much sitting in their bank account, there are far more people who are more likely to have 5% (which is $15,000), which is perfectly acceptable.

Like mentioned earlier in the section about the three most popular types of loans, it is entirely possible to put a lot less down if you have a strong credit score.

You will need to consider a few factors when you are deciding how much you can realistically put down on a house:

• Closing costs
• Interest rates
• Your credit score
• Your potential monthly mortgage payment

Do not feel like you need to be able to put 20% down in order to purchase a home, especially when 3-5% will usually do the trick!

6. Not knowing the full cost of purchasing a home

When you fall in love with a home and make an offer on it, the amount you offered should be all that you have to pay, right? Not quite. That’s where a lot of first time home buyers get into trouble when they are budgeting for a new home.

Before you start looking for your first house, you need to be fully aware of the full cost of purchasing a home.

Here is the breakdown of the actual cost of buying a home if, like in the previous example, you are looking at a home that costs $300,000:

Down-payment

If you put 5% down, that is $15,000 that you will have to pay right off the bat. Do not forget about the downpayment when you are determining how much you have to spend on your home.

Closing costs

On top of your down-payment, you will have closing costs. These costs will include lender fees, title fees, appraisal costs, inspection costs, and taxes. If your closing costs are 3% (they can range from 3-5% depending on each property), that would be $9,000 that you have to provide in order to close on your home. 

Inspection fees: 

A general inspection will typically cost around $450-500. A termite inspection is usually around $65-75. A sewer line inspection (highly recommended) will cost you an additional $250. An appraisal is about $500, and any additional specialized inspections can cost as much as $300 depending on whether or not you need to have someone check out the roof or electrical components of the home. 

It is important that you have every aspect of your home fully inspected by an expert, but all of these inspections do not come cheap. Expect to pay almost $1,600 for your inspection fees, and note that even after paying and going through this entire inspection process, you may not get the house, so you might end up paying these costs more than once as you look at different properties.

Perhaps you got an inspection on the roof and it is a complete disaster and you no longer want to move forward with the house, the money from that inspection is gone. Maybe you get $1,600 worth of inspections, but the seller does not want to negotiate or work with you to make any repairs and you have to pass on the house, the money you spent on all of those inspections will not be returned. 

As such, it’s important to have enough money set aside for these inspections and potentially another round or two of inspections if the first home does not work out for you.

7. Not balancing logic and emotions

Buying a home is such an emotional experience, especially for those who are buying a home for the very first time. It is completely understandable that a first-time homebuyer will be especially susceptible to allowing these emotions to get in the way of logic when they are making decisions throughout this process.

If you are a first time home buyer, you need to keep in mind that you may not get the first house that you put an offer on. Or the second. Or the third. It’s a very competitive market, so it might be tempting to do everything in your power to tilt the odds in your favor. However, the last thing you want to do is overextend yourself and go beyond your means when making an offer because you want to guarantee that it will work out. 

You do not want to be stuck with a house where you have such a high mortgage payment and other lofty expenses that you cannot actually enjoy living in the home all because you were too excited to use reason and make a budget before putting an offer on the “perfect” home.

Buying your first home is a special occasion, but it is also a big decision. Make sure you avoid these top 7 mistakes so that you do not end up regretting the decisions you make during the homebuying process.