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8 Cautionary Notes for a First-Time Homebuyer

Written by:  

Andrew Tavin

Andrew Tavin

Andrew Tavin

Personal Finance Writer

Andrew Tavin a contributing writer for Own Up.

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Fact Checked by:  

Dan Silva

Dan is the Vice President of Marketplace Lending at Own Up. Throughout his career, he has held executive leadership positions in the mortgage and banking industry.

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A circular street sign with arrows pointing in both directions with a red line through the sign

Every first-time homebuyer will have a different experience with their maiden journey into the real estate market, but there are always going to be some similarities. Unfortunately, some of those similarities may be common mistakes that can make your path to homeownership rockier than it needs to be.

Looking for a house without a budget, awareness of your own finances, or proper research can lead to needless frustration and impede your ability to achieve your dream of homeownership. That's why we've collected cautionary notes so you can learn from the mistakes of other prospective homebuyers without having to make those mistakes yourself.

Below are 8 “don’ts” that you’ll want to consider before signing a contract to purchase that first home.

1. Don't Forget to Make a Budget

"Touring houses is fun, while doing math is boring."

That's the opinion of many first-time buyers. A little math upfront, however, will streamline your search and save you from financial headaches in the future.

To ensure you can afford a single-family home or condo, it’s worth pulling together a monthly budget and creating a complete picture of your financial obligations. You can quickly calculate your monthly budget by subtracting your non-housing expenses from your household income. The amount that remains will give you a sense of how much room there is in your budget for monthly mortgage payments, which will help you gain a sense of your purchase price limits and the price range you can target with your real estate agent.

Outlining your budget should also give you some sense of your debt-to-income ratio, or DTI, which is one factor lenders use when determining your loan options.

Without a budget, you may find yourself struggling to stay ahead of your mortgage program (if you can even receive approval in the first place).

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2. Don't Forget to Check Your Credit Score

There are multiple factors a lender will consider when deciding whether to approve your mortgage and what interest rate to grant you.

In addition to the previously mentioned DTI, your credit score and credit report will be a part of your loan application. That's why it's important to check your credit score and pull copies of your credit report prior to the mortgage application process and even before taking the earliest steps to homeownership.

Your credit score is a number based on several factors, including:

  • Your payment history
  • The amount of debt you owe
  • The length of your credit history
  • Any new credit or loans
  • Your credit mix.

Your credit report paints a clearer picture of your credit score, documenting whether you've paid your bills on time and the specific debt you currently owe or have paid down (such as student loans, auto loans, and credit card debt). Lenders will take this information into account when deciding if a loan applicant is an eligible buyer.

It's important to check your credit score and credit report on a regular basis, especially before applying for a loan. This is true for several reasons:

  • Your credit score can impact the interest rate you receive on your mortgage. A higher score may result in a lower mortgage rate, while a lower score -- well, you get the picture.
  • It is possible for your credit report to contain errors. If there are mistakes dragging down your credit score, you should contact the relevant credit bureau to address any errors before applying for a loan.
  • While there's no official minimum credit score required to receive mortgage approval, you'll likely face difficulties if your number is in the low 600s or below. You may want to wait to improve your score to access better mortgage interest rates.

You can download a free copy of your credit report at www.annualcreditreport.com.

3. Don't Skip Your Research

Though online real estate databases can help you narrow your choices, it’s important to visit your dream neighborhoods and zip codes in person.

Consider working with a real estate professional and asking current residents about potential issues that may not always be obvious. For example, an otherwise pleasant neighborhood may become unbearably noisy in the evening if you live in a high-traffic or commercial area.

Of course, this might be easier said than done, especially if you're moving to a different city. If possible, you should try to plan a research trip or even consider renting at the new location so you can research the local real estate market in person before you purchase.

4. Don't Skip Pre-Approval by a Mortgage Lender

Mortgage pre-approval is sort of like a test run for the application process. You submit personal financial documents, like proof of employment, credit score, and tax returns, to a mortgage lender, and you'll (hopefully) receive a preapproval letter.

The letter will say what size mortgage you're pre-approved for and at what rate. While there's no guarantee that you'll receive a mortgage loan at this amount and rate, it should give you a decent idea about what you can actually qualify for.

Going through the pre-approval process can also be an important way to show sellers that you're serious. If one potential buyer has a pre-approval letter and a competing buyer does not, the letter holder will be at an advantage. You want to be the one with the advantage.

Finally, it's a good chance to shop around with different lenders to learn which one can provide the best loan for your situation.

5. Don't Forget to Learn About Your Loan Options

Your ideal mortgage option will depend on a variety of factors, including the length of time you plan to spend in your home, the purchase price, and whether you may qualify for a federal assistance program.

So what are the options beyond conventional mortgages? There are several types of government-backed mortgages, including FDA loans and VA loans.

What’s an FHA Loan?

FHA loans are backed by the Federal Housing Administration and have more flexible terms than conventional mortgage loans when it comes to down payment and minimum credit score requirements.

They do have certain eligibility requirements, however. For example, you'll have to take out mortgage insurance, and the home must be your primary residence, so this isn't an option meant for investment properties.

What’s a VA Loan?

VA loans are backed by the Veteran's Administration and come with their own sets of requirements. VA loans can have even more favorable terms than FHA loans but, as the name suggests, they are only available to veterans.

Are There Other Government Assistance Mortgage Programs?

There are also various government programs offering payment assistance if you run into trouble after taking out a mortgage.

You can ask your real estate agent to help determine which loan program is right for you. They have an interest in making a sale happen, and since the seller is normally the one to pay the agent's fees as part of the closing costs, you can feel confident you're on the same team.

6. Don't Bid Beyond Your Means

Creating a budget isn't enough. You also have to stick to that budget. Even if you're normally a fiscally responsible person, you may be tempted if you find your dream home only to learn the purchase price is outside your budget.

This will already be the biggest purchase you've ever made; is it really so terrible to toss your budget aside?

Yes, it is. Don't forget that you'll be making monthly payments based on the purchase price for many years to come. Even if you can stretch a bit at closing cost time, you don't know what the future will hold.

A 2023 Chamber of Commerce study found that 27.4% of homeowners are "house poor." Translation: They're spending more than 30% of their monthly income on housing expenses, which could also mean they borrowed a larger mortgage than they could handle.

This is a common mistake that first-time home buyers make. Whether you don't want to risk losing a residential property that caught your eye or you're just ready to be done with the process, it can be tempting to make a higher bid than you should.

Thankfully, the responsibilities of homeownership do not come as easy as pulling out a credit card.

First, you'll need to actually apply for your mortgage, which involves submitting application materials such as pay stubs, housing history, and bank statements to a mortgage company.

Even if you can qualify for a loan option large enough to cover your offer, there will still be an appraisal process and home inspection. If the mortgage banker determines that your offer is way beyond what the home is worth, they will be unlikely to give your mortgage approval.

An emotional spender may particularly benefit from the counsel of a mortgage advisor, who is often trained to spot emotional spending and to nudge their clients closer toward a reasonable decision. First-time borrowers should also talk to friends who have been through the process to learn from their experience.

7. Don't Get Caught Off Guard by Hidden Costs

While first-time home buyers are focused on the big number, the purchase price, it’s easy to forget about the hidden costs in the home-buying process. Some mortgage calculators may not even include all of these costs.

“Hidden costs” are a bit of a misnomer, as your lender and broker should be informing you about these fees.

But if you’re unfamiliar with the process, you may not know to ask. Because your mortgage advisor is on your team in a way that the lender (who is aiming for the best deal) may not be, your advisor should be informing you about any nested, additional costs.

Hidden costs can be part of the closing costs, which are specific to your purchase, and may include any of the following:

  1. Loan origination fees
  2. Prepaid daily interest to cover the gap between closing and move-in
  3. Inspection fees
  4. Attorney fees
  5. Credit search fees
  6. Deed recording fees
  7. Mansion taxes
  8. Title insurance
  9. Application fee
  10. Escrow account

Your down payment size will also impact your monthly mortgage payment.

For example, if you aren't able to put down 20% of the payment amount upfront, you may be stuck paying an additional Private Mortgage Insurance payment each month. Private Mortgage Insurance, or PMI, can cost you hundreds of dollars each month, making your monthly payments more expensive than you anticipated.

Don’t forget that income taxes, homeowners insurance, and potential homeowners association fees may also impact your monthly costs throughout the life of the loan. These are all expenses that will most likely fluctuate and increase over time.

8. Don't Hesitate to Lean on Your Support System

When you’re a first-time homebuyer your support system will be crucial. Even if you don’t use a mortgage advisor, you’ll still benefit from the wisdom of professionals throughout the process. These may include your real estate agent, your general financial advisor, and friends or family members who have been through the mortgage approval process before.

If you’ve never purchased a home before, you probably still know someone who has. And even if you’re a first-generation homeowner whose parents aren’t familiar with the process, you can still benefit from your family’s general financial wisdom and practical advice.

If you have friends who have been through the process, that means they understand the unique headaches that accompany it.

When you talk to these friends about their experience, you should come prepared. Your relationship may be casual and informal, but the subject isn’t. Listen to your friends, and take notes.

Good questions include:

  • What would you have done differently?
  • What was your biggest regret?
  • Who or what was your biggest savior?
  • What surprised you about the process of buying a home?

The Bottom Line

It's impossible to avoid every mistake during the homebuying process, but with this list and the advice of your support network, we bet you can avoid a lot of them.

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