10 First-Time Homebuyer Mistakes

Buying your first home may be the biggest and most impactful financial decision in your lifetime. Before you buy, use these tips to avoid the most common homebuying mistakes.

If you’re buying your first home in 2020, you’re in a unique buying market. The number of people buying new houses each year has shrunk substantially over the past decade. There were 1.8 million first-time homebuyers in 2016 compared to 2.13 million first-time homebuyers in 1997. That’s a significant drop, especially considering the U.S. population increased from 272.9 million in 1997 to 323.4 million in 2016.

There are several likely reasons why fewer people are buying houses. Most analysts agree the millennial generation (those born between 1981 and 1996) have struggled to enter the housing market because they entered the workforce already burdened by overwhelming debt — primarily student loan debt, which stands at about $1.5 trillion.

The real estate market has also changed since the 2008 financial crisis. It can be difficult to find an affordable home near a job center like a big city, and banks are more hesitant to lend to homebuyers they consider risky.

Nonetheless, there’s a great deal you can learn from the mistakes of the past. Here are 10 of the most common homebuyer mistakes to avoid as you search for your first home.

1. Not knowing how much you can afford

One of the first mistakes first-time homebuyers make is shopping for a home before they know how much they can afford.

You may have a rough idea of how much you’d like to pay for a house — there’s usually a clear difference between a $300,000 home and a $500,000 home. But even a difference of a few thousand dollars can substantially change your monthly mortgage payments, especially if you can’t afford a reasonable down payment for a more expensive home.

According to Lior Rachmany, CEO of Dumbo Moving and Storage, “One of the most common mistakes homebuyers make is rushing to find a perfect home. The first thing you should be aware of when searching for homes is what you can or can’t afford. Making a budget will help you in two ways. First, by having a budget set, you will [be] less likely to overspend your money. On the other hand, a home-purchasing budget will help you narrow your search and look for the houses you are more likely to buy in the end.”

One of the easiest ways to get an accurate budget is to use a mortgage calculator. Naturally, you need to know the size of the loan you can qualify for, but more important is calculating how much you can afford to pay in mortgage payments and other fees each month. A mortgage calculator provides a rough idea of your monthly payments, so you can estimate the impact your mortgage, property taxes and other expenses will have on your monthly income.

2. Speaking to only one lender

It might seem easier to go straight to the personal bank you already use and ask them for a mortgage. This isn’t necessarily a bad instinct if you love your bank, but you shouldn’t stop there. One of the most common mistakes first-time homebuyers make is speaking to one lender and sticking with them.

Mortgage rates tend to be highly personalized, because they depend not only on market factors, but also on your personal finances. This also means lenders set rates they believe are appropriate. So, if you apply to multiple lenders, you could get different rates and fees from each.

This process allows you to select the mortgage with the lowest interest rate. You could even pit lenders against each other to see which gives you the best offer.

3. Ignoring your credit report

What’s in your credit report has a substantial impact on your ability to get a mortgage, as well on your interest rate while you repay it.

Most people know their credit score. If you don’t, there are plenty of apps that allow you to check your score for free. If your score is low, you may qualify for government-backed loans. But if you’re going with a traditional loan, you’ll want a score of at least 650 — preferably 700 or more.

According to the Federal Reserve, 90% of U.S. mortgages taken out in the first quarter of 2019 were by homebuyers who had a score of at least 650. Meanwhile, 75% of homebuyers had a score of 700 or more.

But your score isn’t the only thing you need to be concerned with on your credit report. It’s unlikely, but still possible there are errors on your report. These errors can impact your score, not to mention how lenders view your ability to repay a loan.

In 2013, a comprehensive study of consumer credit reporting by the FTC revealed 5% of consumers had errors on their credit reports. Unfortunately, even those consumers who did have errors on their credit reports failed to resolve the issue in subsequent years. A 2015 follow-up to this study revealed most consumers who previously had errors on their reports still had errors two years later.

According to the U.S. Federal Trade Commission, you are entitled to one free copy of your credit report every 12 months. If you haven’t already, order your free credit report from annualcreditreport.com.

4. Making a down payment that’s too small

If you’ve done any research on homebuying, you’ve likely learned about the 20% rule: If you put down at least 20% of the purchase price of your home, you can avoid private mortgage insurance (PMI) and save yourself on monthly costs.

While this is undoubtedly true, it doesn’t mean most people hit the 20% mark with their down payment. In fact, the average down payments is just 5.3% of the purchase price.

Nonetheless, this doesn’t mean you should save your cash and put the smallest amount down as you possibly can, either. It all depends on your mortgage and how much you can afford in monthly payments.

For example, if you want to purchase a $300,000 home, you may be able to afford a 5% down payment ($15,000) to do it. But you’ll need to take out a mortgage of $285,000. You’ll have to pay this amount over time, in addition to the interest that’s accrued on it and your mortgage insurance payment.

If you put 20% ($60,000) down, you’ll only need a mortgage of $240,000. You’ll accrue less interest, and you won’t need to pay PMI. The route you choose all depends on how much you can afford each month.

5. Buying too much (or too little) home compared to your needs

Finances aside, it’s possible to buy a home that is just too big for you. Or, for that matter, it’s possible to buy one that’s just too small.

Ron Humes, VP Operations, Southeast Region at Post Modern Marketing — and a former owner and principal broker of his own realty company for 20 years — shared, “Unfortunately, it is not uncommon to see homebuyers purchase a home only to realize that they cannot function in or maintain their home of choice. For some, it is more land than they care to maintain in their busy schedule. For others, they find that they are quickly bursting at the seams and need more room than the property allows.”

Thankfully, there’s an exercise you can do to avoid this mistake. Humes suggests doing the following: “Once you think you have nailed down your requirements for the size of your home and land, picture yourself living in that space throughout the course of a full year. Consider all [the people] you will need to house, the possessions you will retain, and your schedule and lifestyle. Is the property manageable? If you can’t decide, you may wish to rent a similar size property first to see how it fits your lifestyle. The cost of buying a home, selling it, and purchasing another is definitely worth investing the time.”

6. Underestimating your monthly payments

It’s not uncommon for first-time homebuyers to only factor their monthly mortgage payments into their monthly expenses. Unfortunately, there are other monthly expenses you need to consider when you move from a rental property to your own home.

In addition to loan payments, you also need to pay property taxes. These vary widely by state and county, so you’ll need to look up your area to determine your tax rate. According to The Tax Foundation, the lowest tax rates are in 13 counties that have a median property tax of less than $200 per year, but the most expensive counties have median tax rates of over $10,000 per year.

You also need to factor in the cost of homeowners insurance, which averaged $1,173 per year in 2015. You’ll also have to cover utilities like electricity, water, trash pickup and possibly gas. Depending on where you live, you may also need to pay HOA fees, and you should expect to pay at least some amount each year for general maintenance.

7. Taking out an adjustable-rate mortgage instead of a fixed-rate mortgage

If you don’t have tons of cash lying around, you have two options when taking out a mortgage: an adjustable-rate mortgage (ARM) or a fixed-rate mortgage. You can get each type in varying repayment periods, such as 10, 15 or 20 years. But the most common term for a fixed-rate mortgage is 30 years.

A fixed-rate mortgage has an interest rate that is just that: fixed. It doesn’t change for the duration of your mortgage term. This is the most popular type of mortgage. It’s favored by homebuyers because it makes it easier to calculate monthly costs and there is no risk that a monthly mortgage payment will change.

With an ARM, you can usually lock in a low, fixed interest rate for a few years. After that, however, your rate is adjusted based on a market index, so it changes with the stock market. While you could potentially pay less with an ARM when the market is good, you could also potentially pay more — a lot more — if the market isn’t working in your favor. This could potentially increase your monthly payments to levels you can’t afford.

ARMs were immensely popular in the early 2000s, and many experts assign some blame to them for the housing bubble and the 2008 financial crisis. They often become attractive to borrowers when interest rates are high. But they are usually only a good option for investors who only intend to hold real estate for a short period of time before selling it.

If you intend to stay in your home, you should assume the market will turn at some point and that interest rates will go up. Unless you’re willing to take the gamble, you’re usually safer with a fixed-rate mortgage.

8. Failing to gather information about the home

You should never purchase a home without an inspection. In many cases, you can gather that information for a fee. But if you’re buying a foreclosure, you should pay for an inspection yourself as you are likely purchasing the home “as is.”

James Dwyer of Engel & Voelkers Halifax said, “The most important money you will ever spend on a home will be the first $1,000 — gathering information from the home inspection, sewer scopes, radon tests, water tests, etc. [This] will help buyers make informed, educated decisions on buying a home based on information rather than desire.”

If you purchase a home as-is and it has livability issues, you’ll be responsible for fixing them yourself.

9. Not getting pre-approved for a mortgage

If you get pre-approved for a mortgage before you go home shopping, you’ll do so armed with some important benefits. You’ll have peace of mind in knowing you’ve already secured financing. You may also have some bargaining and negotiating power, since sellers are more likely to go with someone they know can pay.

Of course, one of the main benefits of pre-approval is knowing exactly how much you can afford. Benjamin Ross, founder of My Active Agent said, “Buying real estate is not the same as buying a TV at your local retailer. By getting pre-approved, you know exactly how much you can spend and what type of property you can possibly buy. Doing this will save you lots of wasted time and heartache [from] looking at property you are not able to buy even if you wanted. If you are not able to get prequalified, you know you must work on your credit before even thinking about looking at houses.”

10. Being too picky

Finally, first-time homebuyers tend to be pickier about their purchase than second- and third-time homebuyers. This may be difficult for you to avoid. You’re buying your first home. You’ll probably live in it for a long time and you don’t want to be stuck with a home that you hate.

Just keep this in mind: nothing is as permanent as it seems.

Rick Albert, Broker Associate at LAMERICA Real Estate attests that “no home is perfect, but more often than not, changes can be made now or later on.” When looking a homes, he recommends homebuyers “focus more on location, affordability, and if it generally has what you want.”

If you’ve ever watched house-hunting reality TV shows, you should already know nobody ever gets everything on their list when searching for a home, and that’s okay. The money you save today could be saved for home improvements tomorrow. You may even discover things about your new home that you never expected to love.

Buying your first home

Buying your first home isn’t a simple process. You may wish to work with a realtor or financial professional to ensure you don’t make any mistakes. They can also walk you through the process and answer your questions. But as long as you can avoid the above challenges, you should be well on your way to buying a home you both love and can afford.

Michael Rand

Personal Finance Contributor

Michael Rand is a business and personal finance writer based in Beverly, Massachusetts. He holds a master’s degree in writing from Salem State University and spent years producing content for financial services clients as an agency writer. His work has been featured in publications like Interest.com, The Simple Dollar, and Monetize.info.