First-Time Home Buyer Financing Mistakes to Avoid

Shopping for a home can be a stressful experience, especially for first-time home buyers. It is one of the biggest financial decisions you’ll ever make, and no one wants to make a mistake when it comes to financing their first home. The good news is that home-buying is well trodden territory and there are plenty of tips from the millions of people who have been through the experience. Knowing the most common mistakes can help make sure you avoid them.

Shopping for a home before applying for a mortgage

You might believe that applying for a mortgage before finding a house is putting the cart before the horse, but you can actually hurt your chances of securing your dream home if you haven’t been preapproved for a mortgage. Getting preapproved gives you a better sense of your budget and keeps you from waiting around while a lender reviews your loan application. If the market is competitive, the wait for approval could allow a home to slip through your fingers.

Not comparing lenders

It never hurts to explore your options. In fact, it helps more often than not. You will only know you’re getting a good deal on a mortgage when you have several points of comparison. Try to consult with at least three lenders, comparing interest rates, fees and loan terms. Your relationship with the lender is also important, so pay attention to their levels of customer service.

Pay close attention to whether the closing costs are included in the mortgage loan. It is best to pay closing costs up front, because financing them means you’ll have to pay interest. There are also lenders who will include service contracts in the loan, meaning you may not have to pay out of pocket to cover the cost of certain repairs around the house.

Assuming there is a standard for a down payment

Many first-time home buyers will operate under the belief that a 20 percent down payment is the standard minimum for a mortgage, but not everyone has the financial means to make a payment of that size. The average down payment in the U.S. is actually about 6 percent, and there are federal loan programs that allow you to put as little as 3.5 percent down.

So don’t be discouraged if you don’t feel comfortable making a 20 percent down payment. A bigger down payment means a smaller mortgage and down payment of at least 20 percent eliminates the requirement for mortgage insurance, but you need to decide for yourself how much you can afford both in terms of a down payment and the monthly mortgage payments.

Buying a bigger home than your budget

Setting a budget is the first step. Sticking to that budget is the next and more challenging step. When you have fallen head over heels for a home, it can be all too easy to rationalize spending a little bit more than you planned. But the last thing you want to do is overextend yourself and buy a house you can’t afford. Eliminating the breathing room in your budget can create more financial stress, especially when you factor in other bills and expenses. Worst of all, you could face foreclosure if you’re not able to keep up with your mortgage payments.

An adjustable rate mortgage can tempt you to buy a home outside your budget using a low-interest rate. However, there is no guarantee your home will increase in value, which could make it stressful for you when it comes time to refinance or sell your home before the rate increases.

Emptying your savings

You have worked hard to build up your savings, so resist the temptation to wipe it all out in one fell swoop. Save enough money to cover a down payment, closing costs and moving expenses, but make sure you have a comfortable amount of savings left over. You may find yourself having to make a repair soon after you’ve bought the house and you’ll need the money to cover the cost. Always make sure you have enough in the bank to account for unexpected expenses.

It would also be wise to plan for potential increases in home insurance and property taxes.

If you are interested in getting preapproved for a mortgage or simply having questions about the loan approval process, please feel free to contact us.