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Buying real estate can be just as stressful as it is fun. If you're a first-time home buyer, it's really hard to know all the right questions to ask. To help you out, here are some mistakes to avoid as you work to make your first home purchase happen.
You don't need a huge salary or big bank account balance to qualify for a mortgage. Lenders love borrowers who keep their debt low and pay their bills on time. It's a good idea to come to the table with some money set aside, but you might not need tens of thousands of dollars for a down payment. Look into top-rated mortgage lenders that will help you find a loan that fits your needs.
You don't need perfect credit to buy a home. In fact, it's possible to get a mortgage with bad credit. But you'll pay more because the best mortgage interest rates go to people with higher credit scores.
That's why it's so important to stay on top of your credit score. The three major credit bureaus typically provide one free credit report each year. But until April 2022, you can get yours for free each week by visiting annualcreditreport.com, so check yours often. And if you find any discrepancies, you may be able to easily request a correction.
If you need more help, read our guide to learn how to increase your credit score.
Even if you qualify for a mortgage with a low down payment (or even no down payment), you will need to have some money in the bank to qualify. Some lenders want to see just one month's worth of funds in your savings account. Others want to see three months' worth. Although you can use this money any way you want the minute after your loan closes, you won't be able to use it toward the down payment or closing costs. It's a separate requirement called cash reserves.
To help you get ready, use our guide for how to save for a house.
RELATED: Need a savings account? Check out The Ascent's guide to the best savings accounts.
As the owner, you're going to be responsible for every expense related to the home. Right away, you'll need to budget for homeowners insurance premiums and property taxes in addition to the monthly payment on your loan.
If you make a down payment smaller than 20%, there's a good chance you'll be paying for private mortgage insurance (PMI). With an annual premium usually set at between 0.5% and 1.5% of your loan balance, your PMI could run anywhere from $83 to $250 per month on a $200,000 loan.
Then you've got homeowners association (HOA) fees, a longer list of utilities, and maintenance expenses to factor in.
Being a homeowner costs a lot. You'll need to think way beyond the loan payment to come up with a realistic homeowner budget. A first-time home-buyer class can help walk you through that process.
For more information, read our guide on the expenses of homeownership.
After you set your price range for a home, your lender or real estate agent might tell you that you can afford more than what you've decided will work for you. That may not be a good idea.
You're going to want to meet all of your financial obligations as a homeowner and still have money left over to save every month. Go with your own calculations and stay in your financial comfort zone. You won't regret having extra money in the bank, and you can always plan to upgrade to a nicer home in a short time or do a major remodel down the line.
To help you out, make sure to read our guide on how to create a first-time homeowners' budget
You'll do yourself another big financial favor when you shop around with multiple lenders. Even a fraction of a difference in a mortgage rate from one lender could save you thousands of dollars or more over the life of the home loan. Besides the interest rate, lenders also differ in the fees they charge. For example, some charge an application fee while others offer free mortgage pre-approval.
Applying with multiple lenders helps you compare apples to apples. And it won't hurt your credit score as long as you apply for all of them in a short time frame. All mortgage applications made within a rate shopping window are counted as a single inquiry against your score. The rate shopping window is 14 to 45 days, depending on the credit scoring model used by the lender.
For more information, we've rounded up the best mortgage lenders for first-time homebuyers.
Pre-approval and pre-qualification are each appropriate at different times in the home-buying process.
If you are just starting to entertain the idea of buying a home, a mortgage pre-qualification will tell you what loan amount you might qualify for, assuming everything you tell the lender about your finances and credit is accurate.
When you're ready to view homes, get pre-approved. The mortgage lender will verify your information and tell you what you do qualify for. When you find the home you want, the lender will update the data and make sure nothing has changed, including your credit score, your debt balances, and the amount of money you have in savings. Assuming your financial situation has not worsened, your loan will be approved.
If you need more help, our guide on how to get pre-approved can walk you through each step of the pre-approval process.
Arguably the biggest obstacle to homeownership for most people is the down payment. However, there are several ways for a first-time buyer to remove or lower this hurdle, including a zero-down mortgage or down payment assistance (DPA).
Both a VA loan and a USDA loan allow for a zero-down payment. VA loans are for eligible service members, veterans, and some spouses. USDA loans are for low- to moderate-income borrowers buying property in eligible locations, which are usually rural.
Down payment assistance offers a down payment loan (payments are deferred or the loan is later forgiven entirely), or a non-repayable grant (free money).
If you can't get a zero-down mortgage or down payment assistance, look into 3% down payment loans. And if you don't qualify for those, an FHA loan requires only 3.5% down.
For more information, check out our home buyer checklist for everything you need to do before buying a home.
The home-buying process can be stressful, and things might happen that you weren't expecting. It's not uncommon for first-time home buyers to be outbid and outmaneuvered by investors and other buyers. Your home budget might need to be adjusted, and it can be dejecting to find out that you need to save even more money. You might fall in love with a home that you don't get to buy.
Relax. Take your time. Do the math before you make an offer on a house, and stick with your goal. Persistence will eventually pay off, and you'll learn a lot along the way. And to help you stay the course, use our guide on how to get a mortgage.
Here are some other questions we've answered:
If you're a first-time home buyer, don't fall for these mistakes, which might cause you to give up before the game even starts.
Assuming you won't qualify for a mortgage. Mortgage lenders want you to qualify for loans. Give them a chance to find the right mortgage for you.
Assuming your credit is fine. It's important to stay on top of your credit score, which can impact how much you end up paying for a mortgage.
Failing to have enough saved. Every lender wants to see that you have some savings.
Underestimating homeownership costs. Homeownership expenses are more than just the monthly mortgage payment.
Applying with only one lender. Let them compete for your business.
Confusing pre-qualification with pre-approval. Pre-approval shows you're serious.
Assuming you need to make a big down payment. It's possible to get a home with little or no money out of pocket.
Take your time. Ask questions.
If you think you might be eligible for down payment assistance, research every program available in your area to figure out which one will be more financially advantageous.
And if you can, save for a bigger down payment. The more you put down initially, the less interest you'll pay over the life of the loan. The best mortgage rates are reserved for people who make a 20% down payment. People who pay less may also have to pay for private mortgage insurance.
Avoid rushing. A home is a major commitment that you might live with for a long time. Getting the numbers right is important.
Avoid making any changes to your credit profile. You don't want your credit score to drop. That means you should not make a late payment or increase your debt. Don't close or open any credit card or bank accounts. Don't pay off a collection account unless your mortgage loan officer tells you to do so. Also, don't change employers.
Avoid viewing homes too early. Make sure your finances and credit are ready and you've got a mortgage pre-approval in hand. Otherwise, you might be wasting your time since today's homes for sale might no longer be on the market when you're ready to make offers.
Our Mortgages Expert
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