5 Money Mistakes First-Time Homebuyers Always Make, According To Experts

published Mar 4, 2021
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Credit: Joe Lingeman

For first-time buyers, getting your finances in order can be a minefield. From not checking your credit score to underestimating the upfront costs, it’s important to be aware of the things that trip people up when purchasing a home.

To find out the most common money mistakes that first-time homebuyers make — and how to avoid them — we asked a real estate broker and a mortgage lender to share their advice. Here are things they notice that cause roadblocks.

Letting subpar bank statements slip through the cracks

So you think that you’re ready to buy a house? You might have plenty of funds saved for a down payment, but you should also be able to show squeaky clean bank statements for at least a year.

“A buyer should never have overdraft fees in their account,” says Jennifer Bell, managing broker of the Gramercy Group real estate brokerage firm in Chicago. “And remember that if you have an overdraft fee in February it will show up for the rest of the year.”

Getting your finances in order well in advance of finding your perfect home is an important step that many first-time buyers overlook. Bell also suggests that you make sure that all of the funds for the home purchase are in your account at least three months before applying for a mortgage, including any gifts that you are receiving.

Assuming that you need a 20 percent down payment

For some aspiring buyers, the fear of a hefty down payment might have them put off purchasing a property.

“Homebuyers are typically misinformed by consumer survey results that suggest that you need at least a 20 percent down payment to purchase a home,” says Kevin Quinn, the senior vice president of lending at First Internet Bank. “But there are many other options, with the right credit.”

Quinn suggests thoroughly researching what types of mortgages are available in order to find a down payment that fits in with your finances, even if you’re not sure that you have enough savings. Some conventional loans offer programs with much smaller down payments, and FHA loans have more lenient credit requirements and offer down payments upwards of 3.5 percent.

Buying the most expensive home that you qualify for

Some buyers might find they qualify for a pricier home than they anticipated. Although it’s tempting to buy at the top of your budget, this can be a mistake.

“Only you know the payment that you’re comfortable with, and you should buy within your own means,” says Quinn. “Homebuyers sometimes jump the gun and wind up with a house and a mortgage payment that they’re not truly equipped to pay for.”

Before you decide how much you’re willing to spend on a home, you should work out a realistic budget. Perhaps you’d prefer to spend more on leisure and travel, or have plans to make significant investments in your education or a business venture over the next few years. If so, remember that you don’t need to max out your budget.

Forgetting about closing costs

Even if you’ve saved diligently for a deposit, it’s easy to be caught by other costs associated with buying.

“We often think of what we need as a down payment and neglect the thought of closing costs,” says Bell. “This means that buyers do not have enough funds to purchase.”

Closing costs add up quickly and can include application fees, credit report fees, and insurance. It’s a good idea to research and calculate approximately how much extra cash you will need in order to purchase a home and factor this into your savings plan.

Spending too much too soon on your new home

You’ve found your dream home and you’re already fantasizing about furnishings. While there’s no harm in updating your Pinterest board, you should hold out on spending on a home that you’re still in the process of purchasing.

“Sometimes buyers will obtain approval from their mortgage company and go out and buy furniture for their new space, or worse, a car for their new garage,” says Bell. “Underwriters can re-pull someone’s credit as late as the morning of the closing to make certain that the buyer has not obtained any new debt.”

Bell recommends making sure that you have enough savings for the anticipated mortgage payment, taxes, and insurance in addition to your down payment and closing costs right up until you have closed on the house.