When it comes to buying a home, people tend to make the same mistakes over and over. The problem is, the repercussions can last for years. Skipping the home inspection or even small oversights can delay the closing date or have long-term consequences.
1. Don’t ignore your credit history
Your credit history impacts mortgage eligibility and the interest rate you’ll receive. A strong credit profile signals to lenders that you’re a reliable borrower, leading to lower interest rates and saving you thousands over the life of the loan.
What to do instead:
Before applying for a mortgage, review your credit report. Search for any errors such as accounts you don’t recognize or incorrect payment statuses, and dispute inaccuracies early on. Even minor errors can negatively impact your credit score.
2. Don’t miss a payment
When planning to buy a home, consistent on-time payments are essential. Even one missed payment can lower your credit score and raise red flags for lenders. If you’re still paying another mortgage, missing a payment will make you ineligible for a loan for at least a year for most lenders.
What to do instead:
You may want to set up automatic payments for bills including credit cards, student loans, car payments, and utilities. Regardless, make all your payments on time so you don’t get disqualified and experience delays in the homebuying process.
3. Don’t max out your credit card debt
Maxing out your credit cards is one of the biggest mistakes you can make before closing. Credit utilization is how much credit you’re using compared to your limit. For example, if you have a credit card with a $10,000 limit and you have a $2,500 balance, your credit utilization is 25%. This ratio significantly impacts your FICO score, and can lead to a higher interest rate on your loan.
What to do instead:
Before applying for a loan, aim to keep your credit utilization below 30%, ideally around 10%. If your credit utilization is too high, pay down existing balances and avoid bigger purchases with your cards.
4. Don’t make large purchases using debt
Taking on new debt, like car loans, furniture, or even cosigning loans can impact your ability to qualify for a mortgage. Larger purchases can increase your debt-to-income (DTI) ratio, a key factor lenders use to assess how much house you can afford.
What to do instead:
Before buying a home, hold off on any large credit-based purchases. Even if you can afford the payments, adding new debt may reduce your loan approval or lead to higher interest rates. Instead, focus on keeping your financial profile as steady and low-risk as possible.
5. Don’t drain your savings account
While it’s tempting to put every dollar toward your down payment, it’s a mistake to empty your savings account. It’s always best to have a financial cushion for unexpected expenses. That way you’re covered for surprise repairs, medical bills, and even job changes.
What to do instead:
Aim to build an emergency fund with at least three to six months of living expenses. Additionally, set aside extra savings for closing costs, moving expenses, and any home updates or repairs you may need right away. A healthy reserve account can protect your investment from day one.
6. Don’t start house hunting without mortgage pre-approval
To understand how much you can truly afford, mortgage pre-approval is key. Without a pre-approval letter, you might get attached to a home outside of your budget or miss out to another buyer who’s already qualified.
What to do instead:
Getting pre-approved helps you understand how much you can realistically afford based on your credit, income, and debt. It also shows sellers that you’re a serious buyer, giving you a competitive edge.
7. Don’t select the first lender you find
Don’t just go with the first mortgage offer you receive. If you shop around first, you could end up with a lower interest rate and better terms.
What to do instead:
To start, request quotes from multiple lenders, including banks, credit unions, and mortgage brokers. Compare interest rates, closing costs, and loan terms carefully. Even a small difference in rate could save you thousands.
8. Don’t neglect looking at different loan types
Don’t assume a conventional loan with a 20% down payment is the only path to homeownership. There are many alternative mortgage options, and you might overlook a program better suited to your financial situation.
What to do instead:
Take time to research different loan types, including FHA loans with low down payment requirements, VA loans for eligible veterans, USDA loans for rural areas, and adjustable-rate mortgages (ARMs) that may offer lower initial rates.
Common loan types include:
- Conventional Loan: Offers flexible down payment options as low as 3% with private mortgage insurance (PMI). These require a higher credit score and must fall within conforming loan limits.
- FHA Loan: Require only 3.5% down and designed for buyers with lower credit scores. They do include mortgage insurance for the entire loan term.
- VA Loan: For eligible veterans, active-duty service members, and their families, a VA loan offers several advantages: no down payment, no mortgage insurance, and often lower interest rates.
- USDA Loan: For buyers looking in eligible rural or suburban areas, this option requires no down payment. Income limits apply based on location and household size.
- Adjustable-Rate Mortgage (ARM): Begins with a lower fixed rate, then adjusts based on market trends. These can help you save early on, but carry the risk of rate increases.
- Fixed-Rate Mortgage: Offers predictable monthly payments and a stable interest rate for the loan’s duration. This is ideal for buyers who plan to stay in their home long-term.
- Application fee: Up to $500
- Appraisal fees: $300-$500
- Home inspection fee: $300-$500
- Title insurance: 0.5%-1% of the mortgage amount
- Loan origination fee: 1% of the loan amount
- Escrow fees: 1% of the home sale price
- Recording fees: $125
- Property taxes: Varies
- Homeowner’s insurance premiums: Varies
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