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15 First Time Home Buyer Mistakes (And How To Avoid Them)

17-Minute Read
Published on August 18, 2021
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*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

"If I only knew then what I know now."

Ask homeowners about the first time they purchased a home, and that’s the answer you’re likely to hear. Needless to say, there are many mistakes first-time home buyers make. Some are minor, some are costly and some even lead people to purchase a home that is completely wrong for them.

Luckily, all of these mistakes are avoidable if you know what to look for. Here, we provide you the tips you need to avoid these common mistakes before you make them.

Tip 1: Get Preapproved Before Looking For A Home

Getting preapproved for a mortgage helps home buyers in a few ways. It ensures they have the financial ability to purchase a home, helps them understand how much home they can afford and shows sellers and real estate agents they are serious shoppers.

It’s important to understand the difference between prequalification and preapproval. Prequalification is an important tool for helping you figure out what you can afford, but there is no verification of the information you enter. Preapproval, on the other hand, means that a lender has verified your financials, your credit history and your ability to repay and has decided that they are willing to lend to you if the house you choose also meets their requirements.

Tip 2: Don’t Buy At The Limits Of Your Preapproval Amount

The amount the lender says you can afford may be very different from the amount you can comfortably afford. The lender may know your income and even your debt-to-income ratio, but that's all they’ve considered at the preapproval stage.

Your Current Budget

What your lender doesn't know is how much you pay for groceries, utilities, gas and insurance, or how much of your budget these bills will consume when you move. Your lender also doesn't know that you love to travel, eat out regularly or see as many concerts or shows as you can get tickets for.

Use our home affordability calculator to find a more realistic upper limit for your home purchase than the preapproval amount. Be honest about your budgetary priorities. If you can’t live without designer coffee each and every morning, factor that into your budget. Otherwise, you could end up house poor and resentful of your home.

Your New Budget

Your monthly mortgage payment is only the beginning of your new expenses. Remember that your monthly mortgage payment will include not just principal and interest repayment, but also escrow for property taxes and homeowners insurance – together referred to as PITI – as well as any private mortgage insurance payments’ you may have. FHA loans also have their own mortgage insurance premiums. If you’ll be joining a private community, you’ll have to pay a homeowners association fee as well.

Forever Home Vs. Starter Home

You may have dreamed of your perfect forever home, not a starter house, but that doesn’t mean it has to be your home now. You’ll live there someday, but for now, a starter home might be a better choice.

A bigger house means more space to heat and cool, resulting in higher utility costs. More home means more rooms to furnish. More home also means more roof, flooring, siding and windows to maintain, replace or repair. Especially if you’ve always rented before, the costs of home ownership will surprise you.

One solution? Make your first home a starter home. They tend to be smaller, less expensive and closer to city centers. Or consider buying a multifamily home, and have your tenants help pay your expenses. One great thing about multifamily homes is that you get to use the income they generate when you’re applying for a mortgage. Either way, your starter or multi-unit home could continue earning you rental income when you find that forever home of your dreams.

Tip 3: Get Quotes From Multiple Lenders

Your home will probably be the biggest single investment you make in your lifetime. You’ll be borrowing hundreds of thousands of dollars and paying interest on that amount for the next 15 or 30 years. It pays to shop around for the best deal.

Find Out What The APR Is On A Prospective Loan

To compare one loan to another, you need to look beyond the quoted interest rate and understand the annual percentage rate (APR). This is the actual cost of the loan, and it must be disclosed on all consumer credit applications.

Some lenders offer low interest rates but charge fees that lenders charging higher rates do not.  By comparing APRs, you’ll be comparing one loan to another, apples to apples, because it takes into account all of the costs of the loan.

The Benefits Of Comparison Shopping

According to Freddie Mac, getting a quote from just one additional lender could save you an average of $1,500 over the life of a loan. Getting a quote from five different lenders will double your savings, on average.

Not sure which lenders to contact? Do your research. Read a few top lender lists by reputable finance sources. Visit lender websites to learn more about the company and the products they offer. Go over customer reviews to make sure you'll be in good hands after the loan closes.

Rocket Mortgage®  retains mortgage servicing on the mortgages it sells, so you’ll enjoy the same excellent level of customer satisfaction while repaying your mortgage that you had while applying for it. It’s not all about price in comparison shopping.

Tip 4: Look Into First-Time Home Buyer Assistance Programs

Many people overlook first-time home buyer loan programs and grants when shopping for their first home because they don't think they qualify or they don't even know these programs exist. These loan programs and grants make buying a home more affordable and achievable for many people.

You can find all first-time home buyer programs available through states, municipalities and private sources by visiting the Department of Housing And Urban Development (HUD)’s Local Assistance Program page. It will take you to all the resources available where you want to live.

You can also check out the following three main national resources for first time home buyer resources.

HUD

HUD oversees the Federal Housing Administration (FHA). That means when a borrower defaults on an FHA mortgage, HUD takes ownership of the property, which in turn becomes a HUD home.

HUD offers a variety of programs geared toward making homeownership affordable. One example is the Good Neighbor Next Door program, which offers a 50% discount on HUD homes for teachers, firefighters, emergency medical technicians and law enforcement officers.

Fannie Mae

Fannie Mae is a government-sponsored enterprise (GSE) that buys conforming loans from commercial bank lenders and other mortgage originators after closing to keep the mortgage industry liquid. It then repackages them for sale to investors on the secondary mortgage market. When a borrower defaults on their mortgage, Fannie Mae takes ownership of the home.

Fannie Mae's HomePath Ready program helps first time and low- to moderate-income home buyers purchase a home with only a 3% down payment required and will pay up to 3% of the loan amount in closing costs, if you buy a Homepath.com home.

Freddie Mac

Freddie Mac is another GSE. Like Fannie Mae, it buys conforming loans, but from smaller banks, credit unions and savings-and-loan institutions as well as other mortgage originators.

Freddie Mac's Home Possible and HomeOne programs also help first time and low- to moderate-income home buyers by agreeing to purchase low interest loans with low down payments, similar to Fannie Mae’s programs.

Note that Fannie and Freddie don’t make loans themselves. By creating these programs, they are letting private lenders know that they will buy these mortgages after origination. To learn more about these programs, ask your prospective lenders if they participate in these programs.

Tip 5: Consider FHA, VA And/Or USDA Loans

Many people are surprised that there are so many types of home loans to choose from when they start thinking about buying a home. Conforming loans – like those purchased by Fannie Mae and Freddie Mac – are loans made by private lenders according to their own criteria, which must meet Fannie’s and Freddie’s standards but can be stricter.

Government-backed loans differ from conforming loans because the government insures them, and therefore lenders are taking less of a risk should the borrower default.

Learn more about each of these loans and compare them to the conventional loan. Decide if any of them are a better option for you based on benefits and eligibility requirements.

FHA Loans

Some of the biggest benefits of an FHA loan are its relaxed eligibility requirements and relatively low cost. To qualify, you need a minimum FICO® Score of 580 at Rocket Mortgage and a minimum down payment of 3.5%. You may also still qualify to get the loan even if you've filed for bankruptcy or struggled financially in the past.

There are a couple of downsides, however. The FHA requires mortgage insurance premiums (MIP) to be paid for 11 years, even if you reach the 20% home equity threshold that would allow you to drop PMI on conventional loans before then. Another downside is that the FHA appraisal process – which can be more comprehensive than most home appraisals – can be less attractive to sellers fielding multiple offers.

VA Mortgages

If you’ve served in our nation’s armed forces or are a qualify surviving spouse, you may qualify for a VA loan. These are generally the most favorable mortgages around. To get a VA loan, you must have a Certificate of Eligibility. You can qualify for a VA loan with a lower credit score and higher debt and may not be required to pay a down payment. With limited exceptions, you'll have to pay a funding fee – the VA’s equivalent of PMI – but it’s a one-time fee and can be rolled into the mortgage. To be approved, you must have a debt-to-income ratio of no more than 60% and a minimum FICO® Score of 580 at Rocket Mortgage.

USDA Home Loan

A USDA loan requires no down payment and may allow you to roll your closing costs into your loan. Backed by the U.S. Department of Agriculture, this loan has eligibility requirements that include a minimum FICO® Score of 640 for many lenders, a household income that falls below the USDA limit and a home that is located within an eligible rural or suburban area. Rocket Mortgage doesn’t offer USDA loans at this time.

Tip 6: Make A Larger Down Payment

Keep this in mind: the more of a down payment you make now, the less money you'll need to borrow and the more equity you'll start out with. Lenders think of equity in terms of the loan-to-value ratio (LTV). A higher down payment means a lower LTV, which means you'll be less of a risk to lenders, which means you might qualify for a better rate. With a lower mortgage balance and better mortgage rate, you'll pay less each month and ultimately reduce the total interest you pay on the loan. That could equate to thousands of dollars saved.

That said, sometimes you just can’t put enough money aside to reach a 20% down payment any time soon. That’s OK too. Just get the best mortgage you can right now, and make sure your lender removes PMI once you hit 20% equity, or – for FHA borrowers – plan to refinance into a conventional loan once you reach 80% LTV.

Think of it this way: 20% down payment is the best, but second best is whatever amount you need to buy your first home because your housing expenses will become your equity. If you rent, your housing expenses go toward your landlord’s equity.

Apply for a mortgage today!

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Tip 7: Don’t Drain Your Savings For A Down Payment

If the pandemic housing market has shown us anything, it’s that home buyers will enter into bidding wars, pay exorbitant amounts and take extraordinary risks – like forgoing all contingencies – to get sellers to accept their offers

Many people feel compelled to drain their savings in order to come up with enough money to put down to purchase a home, because in many parts of the country, finding a home to rent is just as difficult as finding a home to buy. The mistake many people make is forgetting about all of the hidden and unexpected costs that come with owning a home.

If you don't have extra money set aside to handle these costs – or any other emergency expenses – you could put yourself in serious financial straits, causing you to accumulate more debt, miss payments or go to collections.

Tip 8: Plan For Closing Costs

With such a big emphasis on the purchase price and the down payment, many people fail to plan for closing costs. Generally, closing costs run between 3 – 6% of the home’s purchase price and include:

  • Appraisal
  • Home inspection
  • Property taxes
  • Title and attorney fees
  • Lender fees
  • Application fee
  • Prepaid interest
  • Loan origination fee
  • Discount points (optional)
  • Title search fee
  • Mortgage insurance application fee
  • Upfront mortgage insurance (required on FHA and USDA loans, optional to lower or eliminate monthly mortgage insurance on conventional loans)
  • Lender and owner title insurance

Other costs like flood certification, and homeowners association, assumption and specific mortgage fees will depend on where the home is located and the type of loan you get.

Tip 9: Don’t Skip The Home Inspection Contingency

Because a home inspection may not be required to get a mortgage, some people make the mistake of not getting one. A home inspection protects the lender and the home buyer from purchasing a home that may not be worth the purchase price or have serious issues like structural damage.

In an overheated seller’s market, you may have no choice but to skip the home inspection contingency. Your real estate agent should be able to give you some background information on the home, and the Seller’s Disclosure form should also provide insight.

You can always ask for a home inspection even if you aren’t able to walk away from the contract without losing your earnest money. If the seller refuses, consider this a red flag. You may save more by walking away.

Tip 10: Factor In The Neighborhood 

You may have found the home of your dreams, but have you taken a hard look at the neighborhood it’s in? There’s nothing wrong with buying a house in a borderline neighborhood – and there’s a huge upside if you’re getting an early on an up-and-coming neighborhood – but it’s important that you factor in the ramifications of your home choice.

The first potential problem? You may not like living there. If there are constant parking issues or you have to drive a long distance to get to the store, you may come to hate where you live. And if home values are stuck at a lower level, you may have trouble selling it when you’re ready to move on.

Tip 11: Budget For Moving Costs

When purchasing a home, the focus is mostly on the costs you'll incur, including the purchase price, down payment and closing costs. But there is another expense you'll encounter soon after you close: the cost of moving into your new home.

According to Angi, the average cost of a short-distance move is $1,400. If you plan on moving yourself, you’ll still need to rent a truck and pay – or at least generously feed – your movers/friends.

Tip 12: Leave Room In Your Budget For The Hidden Costs Of Owning A Home

Many first-time home buyers are unaware of the hidden costs of owning a home because they've never owned a home. When moving from an apartment to a home, there can be a number of additional costs you've never experienced paying on your own because a landlord or maintenance person took care of it or it was just cheaper or nonexistent in an apartment. These hidden costs include:

  • Higher utility bills
  • New utilities like trash removal and recycling
  • Homeowners insurance
  • Outdoor maintenance and equipment
  • Maintenance and repair
  • Tools for home improvement and maintenance
  • Furniture to fill more space

Especially if you were forced to skip the home inspection, expect the unexpected when moving into a new home.

Tip 13: Don’t Waste Time Looking For Unicorns

Buying a home is a big financial and personal commitment. It's not easy to move a home, so it's no surprise people want to purchase something they'll like living in for years to come. However, expecting to find the perfect home is a mistake many first-time home buyers make.

Instead of focusing on all of the must-haves and deal breakers, add a third and fourth column to your list – the nice-to-haves and the will-compromise factors. Remember, too, that it isn't always about the perfect look or the perfect amenities. It's about it being the right house to raise your family or live the lifestyle you want. You'll never be able to do that if you keep looking and waiting for something that doesn't exist.

Tip 14: Keep A Tight Lid On Credit Card Applications Before Closing

After the offer is accepted, it can be hard to fight the urge to buy all the things for your new home. Many people apply for new lines of credit – or make large purchases like new furniture, appliances and decorations – before closing on a house. What they fail to realize is, by doing this, they could be affecting their chances of getting the loan needed to close on the home.

Lenders don't just check your credit score during the preapproval process. Most will also check it just before your scheduled closing day. If you apply for credit before closing, it could cause your score to drop significantly. Your mortgage could fall through right before closing.

Tip 15: Don’t Start Thinking About Your Next Home Too Soon

After the thrill of the home buying process is over and things have settled down, some people already start thinking about their next home. This can happen for several reasons, including changes in personal relationships, a caretaking responsibility or a job change.

Whatever the reason, selling a home too soon may have financial consequences.

If your home appreciates, even in the short period that you’ve owned it, you could also incur capital gains taxes. This is a tax on the home’s appreciation.

If you absolutely need to move due to a major life event, consider renting out the home so that you can turn your first residence into a real estate investment.

The Bottom Line: Accept The Wisdom Of Those Who Have Gone Before

First-time home buying is a complex process with many potential pitfalls, but ultimately, it can be a good financial and personal decision for those ready to make the commitment. Get started by reading our 12 steps to buying a house. If you’re ready, you can apply online or give us a call at (888) 452-0335.

Apply for a mortgage today!

Apply online for expert recommendations with real interest rates and payments.

Start Your Application

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.