6 first-time homebuyer mistakes to avoid
Helpful tips for those navigating the homebuying process for the first time
Buying a home can be daunting—especially for first-time homebuyers—but a little knowledge and preparation can set you up for success. Whether you’re buying your first home to live in or are considering purchasing a vacation or investment property, here are six common mistakes to avoid.
Mistake No. 1: Spending more than you can afford
Before you start shopping for a house, take a good look at your budget. Determine what you can afford to pay each month, accounting for your income and any existing expenses.
Generally, your monthly mortgage payments shouldn’t be much more than 28 percent of your monthly gross income. If you have a lot of other debt, that percentage should be even lower. Make estimates based on your current income, not what you anticipate making a few years down the line.
Mistake No. 2: Being unprepared to have your finances scrutinized
To help determine whether you qualify for a mortgage and what the rate will be, your lender evaluates your credit report and your debt-to-income ratio, which is the relationship between how much money you owe and how much money you have coming in. You need to show your lender your tax returns, pay stubs and financial account statements, so make sure you have those documents prepared. Check your credit report to make sure there’s nothing unexpected in your financial profile. To ease the qualification process and help you get the best terms on a loan, work to improve your credit score and debt-to-income ratio before you try to borrow.
Mistake No. 3: Not understanding the difference between prequalification and preapproval
When lenders prequalify you for a mortgage they provide an estimate of what they may lend you. Prequalification can help give you an idea of what your price range should be. It’s important to note that being prequalified doesn’t guarantee you’ll get a loan, but it can help the process.
A preapproval is a conditional loan approval where your credit and ability to repay are evaluated by an underwriter, based on required credit and income documentation. The preapproval is generally conditioned on your financial situation not changing from the information you initially provided and you choosing a property that meets lender guidelines. Make sure your preapproval has been issued by a mortgage underwriter who has assessed your ability to pay back your loan.
Mistake No. 4: Skipping the inspection
The home inspection is an added expense that some first-time homebuyers don’t expect and might feel safe forgoing. After all, you’ve seen the property and nothing appears to be wrong. But professional inspectors often notice things most of us don’t, so this step is especially important if you’re buying an existing home (as opposed to a new construction, which might come with a builder’s warranty). If the home needs big repairs you can’t see, an inspection helps you negotiate with the current homeowner to have the issues fixed or adjust the price accordingly.
Mistake No. 5: Failing to account for closing costs
In addition to your home inspection, buying a house involves closing costs beyond the down payment, and they can be significant. These costs—including attorney fees (if applicable) and title insurance—are due when you sign final mortgage loan documents. Typically, closing costs total 2 to 5 percent of your home’s purchase price, so add this cost to your budget. You can use Bank of America’s Closing Costs Calculator to better understand the total amount of money you’ll need.
Mistake No. 6: Overlooking additional expenses of homeownership
Once the keys are yours, you have additional expenses on top of your monthly mortgage payment such as property taxes, homeowners insurance and regular maintenance. Depending on where you live, you may also have to pay fees to a homeowners’ association or a co-op board. If you establish an escrow account with your lender, your monthly payments will include property taxes and insurance on top of your mortgage’s principal and interest. When determining how much you can afford to pay each month for a home, build these expenses into your budget.
If you are seeking more information about purchasing your first home, you may want to explore Bank of America’s mortgage rates and loan options.