Buying a home is stressful, especially if it’s your first time. Today’s housing market, where homebuyers continue to face historically low affordability, doesn’t make it easier.
While market trends like mortgage rates and housing supply aren’t within your control, other homebuying steps are, such as choosing the right mortgage lender or getting preapproval for a loan. Knowing which common issues you need to plan for will make the process smoother and help you avoid mistakes along the way.
If you’re planning on buying a home this year, here are the common mistakes experts see, plus tips on how to avoid them.
Mistake 1: Not getting preapproved for a mortgage
A mortgage preapproval lets a seller know you’re serious about buying. Preapproval can speed up the paperwork process and improve your chances of having an offer on a home accepted, especially in a competitive market.
A preapproval letter from a bank or lender says the type of loan and the amount you qualify for based on your financial history and documentation. Lenders take an in-depth look at every detail of your financial background -- pay stubs, income tax returns, monthly debts -- and conduct a hard credit check.
If you wait to get preapproved until the last minute, you might be scrambling to contact a lender and miss the opportunity to put a bid on a home. Preapproval is typically valid for up to 90 days.
Preapproval isn’t the same as prequalification. Prequalification doesn’t require you to fill out an extensive application and won’t carry the full weight of a preapproval letter from a lender. Still, mortgage prequalification is helpful in the early stages of househunting because it tells you how much you might be able to borrow for a mortgage.
Pro tips
- Before you’re ready to put an offer on a home, review your finances and get your documents in order to submit a preapproval request.
- You only need one preapproval, but having preapprovals from multiple lenders could help you choose the right lender.
Mistake 2: Not monitoring your credit report
Your credit score not only determines whether you get approved for a mortgage. To qualify for a conventional loan, you typically need a credit score of at least 620. Your credit score also influences your mortgage interest rate: Borrowers with credit scores above 740 are usually offered the lowest interest rates. Before you start looking for a home, do what you can to increase your credit score and keep a close eye on your credit report.
Pro tips
- Monitor your credit by accessing a free credit report regularly from each of the three credit reporting agencies at AnnualCreditReport.com.
- If you spot any mistakes or inconsistencies on your credit report, try to resolve them as early as possible.
Mistake 3: Buying a home when you have debt
The amount of debt you have also determines whether you qualify for a mortgage. Your debt-to-income ratio is the amount of debt you carry compared to how much you earn. To calculate your DTI, combine your monthly borrowing expenses, including home payments; student loans, auto loans or other monthly loan payments; credit card payments; child support and alimony payments. (Do not include expenses such as groceries, utilities or gas.)
After you’ve added up your total monthly debt, divide that figure by your gross monthly income. Many lenders like to see a DTI of 36% or less, but some will accept a DTI as high as 50%. A lower DTI is better.
Pro tips
- Make a plan to pay off all your debt (personal loans, credit cards, student loans), and start saving for a down payment.
- Avoid taking on more debt and increasing your DTI before you close on a home.
Mistake 4: Buying a home you can’t afford
In many cases, a lender may preapprove you for more than you need to spend on a home. And while it can be tempting to look at houses outside your budget, it won’t help you in the long run. Before you start touring homes, figure out how much you can realistically afford and stick to your budget. Make sure to factor in a monthly mortgage payment, closing costs (usually between 1% and 6% of the cost of your home loan) and other fees.
Pro tips
- Look for homes that are below the figure you’re approved for. That will give you some wiggle room when you’re negotiating with the seller or competing with other buyers.
- If all the homes you’re finding are out of your price range, consider holding off until you have a higher down payment or your income increases.
Mistake 5: Not saving enough for a down payment
If you’re applying for a mortgage, one of the biggest mistakes is not having enough money saved for a down payment. At a minimum, you’ll need at least 3% of the purchase price. A larger down payment is advantageous because it means a smaller home loan, giving you more equity in the home, lower monthly payments and less interest owed over the life of your loan.
A 20% down payment is considered the standard, though most homebuyers put down less. If your down payment is below 20%, you’ll be required to pay private mortgage insurance, or PMI, which will increase your monthly payments.
Pro tips
- Research down payment assistance programs.
- Find ways to boost your savings, like automating transfers or putting your cash in a high-yield savings account or certificate of deposit (CD).
Mistake 6: Not accounting for moving and other upfront costs
Your down payment will likely be the largest upfront cost when you buy a home. But you’ll also need to pay closing costs for your mortgage, which can run between 2% and 5% of the asking price. Your lender may also require you to make an upfront deposit into an escrow account for property taxes and homeowners insurance. Plus, there’s the cost of actually moving. If you’re relocating to a different state, your moving expenses could be several thousand dollars.
Pro tips
- Calculate upfront costs and moving fees before you start house hunting.
- Factor closing costs into your homebuying budget from the beginning.
Mistake 7: Choosing the wrong term or type of mortgage
While most people opt for a 30-year fixed rate mortgage, it’s not the best fit for everyone.
You can choose between a fixed-rate mortgage, where you lock in your interest rate, or an adjustable-rate mortgage (ARM). An ARM has an interest rate that changes with the markets over time, so when rates go up, your monthly mortgage payment goes up, too.
You can also choose your loan term, that is, how long your payment plan will last. With a longer-term mortgage, such as a 30-year, you’ll pay less each month but more in interest over the course of your loan. A shorter-term mortgage will have higher monthly payments but will save you in interest costs.
Pro tips
- Compare different offers to see how the term and rate will affect your monthly payments and total interest.
- Determine if you want to prioritize lower monthly payments or a shorter loan term. You can’t have both.
Mistake 8: Overlooking government-backed loans
Conventional loans may be the most popular option in the mortgage industry, but government-backed loans, such as Federal Housing Administration loans, Veterans Affairs loans or US Department of Agriculture loans, can be more affordable and accessible.
If you have just average credit, it’s easier to qualify for loans guaranteed by the government. The minimum credit score for an FHA loan is around 580, significantly lower than the 620 minimum for conventional loans. VA loans offer you the option to finance 100% of your home purchase without the barrier of a down payment.
Pro tip
- Learn what programs you may qualify for before you start your homebuying journey.
Read more: These 8 First-Time Homebuyer Programs Can Save You Money on Your Mortgage
Mistake 9: Not working with a real estate agent
Attempting to buy a home without a real estate agent makes the process more arduous than it needs to be. A real estate agent can give you professional legal guidance, market expertise and support, which will save you time, money and stress. They can also increase your chances of finding the right home so you don’t have to spend hours scouring the internet for listings.
Pro tips
- Ask trusted friends and family for personal recommendations.
- Interview multiple agents to find someone who is active and experienced in your area.
Mistake 10: Not shopping around for lenders
Researching and comparing multiple mortgage lenders can seem time-consuming and unnecessary. But it’s critical. Getting multiple rate quotes from different lenders can help you score a lower interest rate or better loan terms. Even a difference of 0.50% on your mortgage rates can save you thousands of dollars over the life of your home loan.
Pro tips
- Get at least three loan estimates from lenders to do a side-by-side comparison.
- Before settling on a lender, pay careful attention to interest rates, fees, repayment terms and customer service reviews.
Mistake 11: Waiving a home inspection
Home inspections normally take place right after the seller accepts the buyer’s offer. An inspector will look at the condition of the roof, HVAC system, plumbing, electrical, foundation and more. You can also get additional inspections for things like chimneys, mold or termites.
A home inspection isn’t required to buy a new home, but it can save you money in the long run. You don’t want to discover a home repair expense after you’ve settled into your new home. Plus, you can use anything that needs to be fixed, replaced or repaired as leverage to negotiate with the seller before the sale is closed.
Pro tip
- Home inspections are an added expense, so make sure to factor the cost into your homebuying budget.
Mistake 12: Making an emotional decision
It’s normal to feel many emotions during the homebuying process, from excitement and hope to stress and nerves. But letting those emotions take over could lead to a rushed decision you might regret down the line, especially if you end up overpaying or stretching your budget too thin.
Pro tips
- When you start touring houses, keep your homebuying budget in mind at all times.
- Regularly check in with trusted peers or family if you have doubts or concerns regarding a home or your finances.
Mistake 13: Letting the market dictate your moves
The real estate market can be volatile and unpredictable. Home prices and mortgage rates never drop dramatically overnight, and small changes in the market shouldn’t be an excuse to rush out and buy. The homebuying process should always be specific to your household situation and needs, not just based on the season.
Pro tips
- Keep an eye on market conditions, but prioritize taking steps you can control, such as saving for a down payment and increasing your credit score.
- Decide to buy based on whether it makes sense financially.
