2. Looking At Only One Mortgage Rate Quote
Getting a mortgage quote from a lender may seem time-consuming, as it typically involves speaking with a professional and providing financial documentation. In this instance, relying on the first quote you get may be time-efficient but not cost-efficient.
Another lender could offer a deal that will save you money over the lifetime of the loan, so getting multiple quotes is the best way for buyers to choose the right lender and get a mortgage with the best possible rates and terms.
3. Not Working With A Real Estate Agent
Can you buy without a real estate agent? Yes. Should you? That answer may be more complicated.
Real estate agents are experts. Although you may save some money by handling the process yourself, having a real estate expert in your corner can help ease anxiety and make the home buying process go more smoothly overall.
4. Buying More Home Than You Can Afford
Although an initial mortgage approval estimates how much house you can afford, this amount isn’t always going to fit within your budget since there’s often a difference between your debt-to-income ratio (DTI) and your monthly expenses as a whole.
When a lender reviews your financial information for approval, they rely on your DTI to determine how much of your monthly income is going toward debt bills. But DTI doesn’t account for all your expenses, and costs like groceries, utilities and health insurance can quickly add up. Therefore, buying a home worth your entire approved mortgage amount may make it difficult for you to afford other monthly payments.
Be sure to consider any monthly expenses that may have been unaccounted for in the initial approval process. In addition to your current budget, factor in extra costs that will come with being a homeowner, including closing costs, maintenance and the potential for increased utility costs.
5. Not Checking Your Credit Report
Ignoring or not observing your credit score throughout the home buying process can lead to unchecked errors that could impact your loan approval or lead to less favorable loan rates and terms.
Although your credit is pulled during the lender’s initial approval, lenders will recheck it just before the scheduled closing day, and changes in the credit report could mean changes to your loan. For example, suppose you apply for new credit cards or fail to make payments on existing credit cards before closing. In that case, your credit score could drop significantly, making it difficult to qualify for financing.
6. Waiving A Home Inspection
A home inspection can be important for avoiding future problems within the home. While some home buyers may choose to forego inspections – especially during the bidding wars you may encounter in a seller’s market – home inspections and the safety they provide shouldn’t be undervalued.
Home inspections protect home buyers and lenders in cases of serious issues with the home’s structure or core systems. After the home inspection, you’ll receive a report with any identified or potential issues in the home, and you can use this to negotiate repairs or a lower purchase price with the seller.
7. Spending All Of Your Savings
Buying any house is expensive. Saving for the down payment and closing costs alone can be time-consuming, but it’s worth taking the extra time to save some money beyond the bare minimum of what you believe you need.
Draining your savings can put you in a troublesome position when it comes time for other hidden or unexpected maintenance costs, leaving you vulnerable in emergency situations. So, while that extra bedroom may be appealing, make sure you can afford the home and your mortgage without depleting your savings.
8. Not Saving Up Enough Money
So how much money should you have saved? There’s a number of expenses to save for when you’re buying a house for the first time, including:
- Down payment: This is the part of the home’s purchase price that you pay upfront. In the past, it has been the gold standard to put down 20% of the purchase price in the down payment but doing this is less common today. Some loans, such as VA loans, require as little as 0% down.
- Closing costs: These costs may include appraisal fees, title fees, lender fees, application fees, loan origination fees, property taxes, mortgage insurance and more – and the price tag for these costs can quickly add up to as much or more than your down payment. In general, you can expect to pay about 3% – 6% of the purchase price of the home in closing costs, on top of what you already paid for the down payment.
- Homeowners insurance: This insurance covers damage to your house and the assets inside it, and it is typically required by your mortgage lender. Because every insurance company uses a different formula to determine your specific premium, anticipating insurance costs can be hard. However, you can find this cost on your Closing Disclosure document, which lists your mortgage loan terms in detail.
- Property taxes: Paid monthly, these fees are based on the assessed value of your property.
- Home maintenance: Once you move into your new home, you’re bound to find a few opportunities for upgrades and improvements. Whether it’s simple home maintenance or a more involved remodel, be sure to consider these costs ahead of time.
- Utility bills: While you may think you understand utility costs from your time as a renter, keep in mind that these costs vary significantly between locations, and it will cost more to light and heat a four-bedroom house than a two-bedroom.
- Moving costs: This one may seem simple enough, but some buyers are so focused on their new home that they forget the time, effort and money it will take to pack up their old one. Moving can be expensive, so we recommend establishing your moving plan early on so you can save for professional movers, if needed.
- Homeowners Association (HOA) fees: Depending on the type of home and the neighborhood, you may have to pay HOA fees, which typically cover trash pickup, landscaping and perhaps other community amenities. These types of fees are most commonly found in planned neighborhoods, townhouses, multi-unit apartment buildings or condominiums.
9. Not Making The Right Down Payment
The down payment you make on a home impacts your interest rate and the size of your monthly mortgage payments. Many believe the myth that you always need to put down 20% of the purchase price, but this isn’t typically the case – as long as you’re willing to pay for private mortgage insurance (PMI).
PMI is a type of mortgage insurance on a conventional home loan that protects the lender if you default on your loan, and it’s typically required until you reach 20% equity in the home. If you can afford a larger down payment, it may be worth it to avoid this additional cost. However, a 20% down payment is simply not attainable for many first-time home buyers.
The average down payment for a home is 6%, according to data from Attom Data Solutions.
10. Neglecting First-Time Home Buyer Programs
Many people don’t realize that first-time home buyer programs and grants can help you afford to buy a home. Certain states and cities provide these assistance programs, so be sure to check your local government websites to see if you qualify for additional financing. Several national programs also help low to moderate-income home buyers purchase a home with as little as 0% down.
11. Ignoring Government-Backed Loans
When considering mortgages, most home buyers think of conventional financing, but other types of loans that are often overlooked may be more affordable. Below are three of the most commonly used options:
- FHA loans: FHA loans are backed by the Federal Housing Administration, protecting the lender in the case of loan default and therefore securing more favorable loan terms. These loans typically come with lower down payment and minimum credit score requirements, although you’ll be required to pay a mortgage insurance premium (MIP).
- VA loans: VA loans are mortgages offered to qualifying veterans, active-duty service members and surviving spouses. These loans are backed by the Department of Veterans Affairs, which minimizes the lender’s risk and allows them to offer loans to prospective buyers in less favorable financial situations.
- USDA loans: USDA loans are backed by the U.S. Department of Agriculture and can make purchasing a home in rural areas more affordable. Note that as of July 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
You might qualify for a mortgage type you’ve never considered before, so it’s worth exploring your options and doing your research to see what’s out there.
