Every year, first-time home buyers venture into the market and make the same mistakes that their parents, siblings and friends made when they bought their first houses.
But today’s novice buyers can stop the cycle. Here are 12 mistakes that first-time home buyers make — and what to do instead.
1. Not figuring out how much house you can afford
Without knowing how much house you can afford, you might waste time. You could end up looking at houses that you can’t afford yet, or visiting homes that are below your optimal price level.
For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won’t keep them up at night. Sometimes it’s a good idea to aim low.
How to avoid this mistake: Use a mortgage affordability calculator to help you know what price range is affordable, what’s a stretch and what’s aggressive.
2. Getting just one rate quote
Shopping for a mortgage is like shopping for a car or any other expensive item: It pays to compare offers. Mortgage interest rates vary from lender to lender, and so do fees such as closing costs and discount points.
Mortgage applications within 45 days count as one credit inquiry.
But according to the Consumer Financial Protection Bureau, almost half of borrowers don’t shop for a loan.
How to avoid this mistake: Apply with multiple mortgage lenders. A typical borrower could save $430 in interest just in the first year by comparing five lenders, NerdWallet finds. All mortgage applications made within a 45-day window will count as just one credit inquiry.
3. Not checking credit reports and correcting errors
Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that’s higher than you deserve. That’s why it pays to make sure your credit report is accurate.
4. Making a down payment that’s too small
You don’t have to make a 20% down payment to buy a home. Some loan programs (see item No. 5) enable you to buy a home with zero down or 3.5% down. Sometimes that’s a good idea, but homeowners occasionally have regrets.
In a survey commissioned by NerdWallet, one in nine (11%) homeowners under age 35 agreed with the statement “I should have waited until I had a bigger down payment.” It was one of the most common regrets that millennial homeowners had.
The key is making sure your down payment secures an affordable monthly house payment.
How to avoid this mistake:Figuring out how much to save is a judgment call. A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments. The downside of taking the time to save more money is that home prices and mortgage rates have been rising, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase. The key is making sure your down payment helps you secure a payment you’re comfortable making each month.
In another survey commissioned by NerdWallet, millennial homeowners described how long it took to save for a down payment. Among millennials who had bought a home in the previous five years, it took an average of 3.75 years to save enough to buy. So if it’s taking you three or four years to save up, you have plenty of company.