13 Common First-Time Home Buyer Mistakes And How To Avoid Them

When we bought our first home, we had no idea what we were doing. And like many first-time home buyers, we were shocked at just how unprepared and naive we were about the actual process. When we look back at our experience – and continue to go through the joys and trials of homeownership – we find ourselves saying, “I wish I knew …” or “I wish someone had told me …” The reality is there were tons of resources available to help us – we were just too wrapped up in the excitement to explore those resources. That was one of our biggest first-time home buyer mistakes. It’s one of the biggest mistakes of many first-time buyers. But it doesn’t have to be yours.

This resource will help you avoid that and 13 other first-time home buyer mistakes, separated out into three different areas: the mortgage, the finances and the home.

1. Looking For A Home Before Getting Approved

There are a couple things getting approved for a mortgage will do for you. First, it tells you how much house you can afford. This information will help you create a budget and narrow your search to homes and neighborhoods that realistically fit within that budget. When you start looking before you know your max spend, you run the risk of falling in love with a home or location that you simply can’t afford.

The other thing your approval does is show real estate agents and sellers that you are a serious buyer. This can help your chances in competitive markets, where buyers lose out on homes simply because they have not been approved for a mortgage yet. While you can start house hunting without preapproval, save yourself the home buying heartbreak and get approved before you even start your search.

2. Trying To Get Financed For A House Listed Above The Appraised Value

A lender can only lend up to the appraised value of the home and will typically lend between 80% and 97% of the value, depending on the loan and borrower. A lender will never lend more than the home is worth. If the appraisal comes in lower than the asking price, you will not be able to borrow the difference to pay for the home. Instead, you’ll need to renegotiate the price with the seller. If the seller refuses to lower the asking price, the only way around this is to pay a higher down payment out of your own pocket to cover the difference. But here’s the thing – do you really want to?

When you purchase a home at a price that is over the appraised value, you’re essentially buying a home that is worth less than what you paid for. You also run the risk of selling the home for less than what you paid for. That’s money you may not be able to get back.

3. Not Shopping Around For Mortgages

Not all lenders are alike, nor do they all offer the same rates or charge the same fees. When you shop around for mortgages, you’ll get a number of different quotes to choose from – some that may be significantly lower than others. Lower rates and fees can save you hundreds or even thousands of dollars. When shopping around, don’t just pay attention to interest rates. Compare things like title fees and closing costs, too. Shopping around also includes comparing reviews and doing research on each company to make sure it is a mortgage lender you want to work with regardless of the monetary cost.

4. Not Reviewing Your Credit Report Before Applying For A Mortgage

Lenders review your credit report and credit history to ensure you are willing and able to uphold the financial responsibilities of your loan, like affording the monthly payment and paying it on time. Your credit report will show any account you’ve opened, any late or missed payments and any bankruptcies or collections you’ve had in the past. This can help the lender determine what type of borrower you are, if they want to extend credit to you and on what terms. Your report will also provide a credit score, which could automatically disqualify you from certain loans if it is too low.

Reviewing your credit report before you apply for a mortgage will help you avoid any surprises along the way and allow you to be proactive if there are any problems. If you notice your score just barely passes the minimum requirement, you’ll know not to do anything that will negatively affect your score (see mistake #5). If you notice any errors on your credit report, you can work to remove them before they affect your qualification. If you need to raise your credit score to qualify or to get better rates, you can give yourself the time to do it. Just know that raising your score or disputing errors may take a while, so check your report as soon as possible and plan to wait a few weeks or months before applying for a loan.

You can start monitoring your credit with the Rocket Money^SM app.

5. Messing With Your Credit Score

Mortgage approval isn’t the only time a lender will pull your credit report. They will review your report again right before closing to make sure your financial situation hasn’t changed. If something changes drastically on your report, your lender could potentially back out of the loan. So, as you go through the mortgage process, refrain from any of the following actions that can negatively impact your credit and your ability to get a mortgage:

• Opening new credit accounts
• Getting a personal loan
• Making big purchases, especially on a credit card, and increasing your utilization
• Making a late payment or missing a payment altogether

Opening new accounts, taking out another loan and increasing your utilization all affect your debt-to-income ratio, which needs to be below a certain percentage – typically around 43% – for you to qualify for a mortgage. DTI is the debt you have each month compared to your gross monthly income. To calculate your DTI, add up your total monthly minimum debt payments and divide the total by your monthly income. The debt that is included in the calculation is any debt that shows up on your credit report, including student loans, auto loans and credit card payments.

6. Not Sourcing Cash Deposits

During the mortgage process, the lender will review your bank statements from the past 60 days to verify your income and ensure the money in your account came from a legitimate source. They are looking to make sure that none of the deposits are borrowed money that you must pay back. In order to do this, they’ll need to know the origin of all money you deposit into your account. While it’s easy to track direct deposits and tax refunds, cash deposits can be tricky. You must be able to prove that the cash you deposit into your account came from a legitimate source, like a job, gift, cash sale or repayment of a personal loan you provided. Without proof of where they came from, they can jeopardize your mortgage approval.

Paper trails are the best way to verify the source, so make sure you have copies of receipts, wire transfers, contracts, pay stubs, letters of explanation, gift letters and marriage licenses (for wedding gift funds) ready to provide before you’re even asked for them.

7. Not Knowing The True Costs Of Homeownership

When people purchase a home, they often only focus on (and save for) the sale price and the closing costs. But after you’ve been handed the keys to your new home, a slew of other costs may need to be added to your monthly budget. These costs could include:

• Property taxes and homeowners insurance
• Property maintenance, repairs and replacements
• Higher utility bills
• Tools and lawn care equipment
• Furniture and appliances
• HOA fees

While it doesn’t have to do with money, you should also consider the cost of time. When you own a home, you’ll likely spend many weekends taking care of it. Make sure that you have a plan to account for these additional time and money expenditures.

8. Depleting Your Savings

It can be tempting to use all the money you’ve saved throughout the years to make your down payment – especially when it can allow you to make a 20% down payment and, thus, avoid paying mortgage insurance. But depleting your savings is risky, even more so when you’ve just purchased a home.

Without savings, you could put yourself in dire financial straits should you lose your job, have a medical emergency, get into a car accident or need to repair or replace a costly appliance. Without money available to handle such unanticipated costs, you may have to borrow money, putting you more into debt. Even worse, you may have to choose between paying your bills or paying for something you absolutely need.

Make sure you have an emergency fund built up before you purchase a home, and don't consider that money as part of your down payment. That way you'll still have your emergency fund in place even after you move into your new home. Some financial professionals recommend at least $1,000 or enough to cover your insurance deductibles, while others recommend 3 – 6 months’ worth of expenses.

You should also separate the money you are saving for a down payment from your regular savings account. That way, you won’t be tempted to dip into your regular savings to make up that down payment, nor will you be tempted to borrow money from your down payment. Saving for a down payment can be challenging and may take some time. Make sure you create a plan and timeline ahead of time.

9. Buying A Home You Can’t Afford

Just because you qualify for a certain amount of money doesn’t mean you should borrow that much money. While lenders get a good amount of information on your finances, they don’t get the whole story or see the whole picture. They only see debts that are listed on your credit report and don’t take into consideration other financial obligations like gym memberships, utility bills, or other personal debts. So while they might think you can afford a $250,000 loan, the reality is you may not be able to. Even if you could swing it, what will you be sacrificing to do so?

The more money you have going toward your monthly mortgage payments, the less money you have to go toward other items in your budget. Not only that, but you also have less wiggle room for unexpected costs or higher spend months that may include holidays or vacations.

Instead of focusing on how much money you could borrow, focus on how much money you can afford to borrow based on your current budget.

10. Not Researching The Surrounding Area

The house is typically the main focus when buying a home, but it shouldn’t be the only thing you pay attention to. When you purchase a home, you’re not just buying the house; you’re buying the location and the life you’ll make there. You may find your dream home, but if it’s not in a good location, life there could be a nightmare. When searching for homes, make sure you research the neighborhood as well. Are there restaurants and grocery stores nearby? What is the school district like? What about the crime rate? Is it in an area where home prices are increasing? Is it near railroad tracks, a construction site or a busy intersection? These are all things you want to consider that will impact your day-to-day life.

11. Ignoring Red Flags

It can be hard to walk away from a home you love because of a seemingly small issue, but certain things that seem small can be huge, costly problems for a new homeowner. Do not ignore certain red flags that come across during the home buying process, like:

• Issues raised during the home inspection
• Issues listed – and often downplayed – on the housing disclosures
• Low school rankings or high crime rates
• Interior or exterior odors
• DIY repairs, renovations and additions
• Pest damage
• Lack of permits or compliance documentation

12. Compromising

Remember that you are the one who has to live in the home every day. You are the one whose life will be affected or inconvenienced by a home feature you decided to settle on. You may think that you’ll get used to shuffling cars in your one-car driveway or you’ll eventually love that tiny laundry closet, but you probably won’t. Do yourself a favor and don’t force yourself to live with something you hate. Make a list of absolute deal breakers and keep it with you when looking at homes. If a home features one of those deal breakers, it likely isn’t the one for you.

13. Not Thinking About Your Future

When you purchase a home, chances are you plan on staying in that home for at least a few years. And so much can happen in just a few years! Do you plan to have more children or more dogs in the future? Will you need a big, fenced-in yard for those kids or dogs to run around? Are you a budding entrepreneur who will need a home office? All of these things will affect your requirements in terms of the size of the house you purchase, its amenities and even its location.

The Bottom Line: Avoid These Home Buying Mistakes To Save Time And Money

Buying a home can be an exciting and intimidating process – especially if it’s your first. Working with a lender that can walk you through the mortgage process, offer advice and answer questions along the way will help you avoid these mistakes and make the process smoother. Before you know it, you'll be living in your new home.

If you are ready to take the first step in the home buying process, you can get started today with the Home Loan Experts at Rocket Mortgage^®. They’ll help put you in a position to succeed with your first home purchase experience. Get preapproved now to start the process.