Top 5 Mistakes First-Time Homebuyers Make

Every year, an average of 1.8 million first-time United States homebuyers become homeowners. For many first-time homebuyers, the journey from renting to owning is riddled with questions, concerns, and, of course, a mistake here and there. In fact, every year, countless buyers think that they will avoid the mistakes of their parents, friends and colleagues; unfortunately, the same mistakes are often made. The good news is that the team at Southwest Funding has gathered together the top five first-time homebuying mistakes so that you can enjoy a mistake-free real estate journey into homeownership.


Mistake #1. Not Answering the Question, “How Much House Can I Afford?”


If you don’t know how much house you can actually afford, then you will be wasting your time. Even worse, you might end up falling in love with a house that is way outside of your budget. The good news is that there are a few simple steps that you can take to avoid making this emotionally and financially draining mistake.


  • Figure out how much house you can afford with a mortgage calculator. — A mortgage calculator is one of the simplest and easiest tools that you can use to accurately pinpoint how much money you can spend on a monthly mortgage. This tool should be your first step on the homebuying journey.

  • Set your budget. — Before you meet with a lender, you should have a real estate budget in mind. This budget should be designed with a maximum and ideal mortgage payment. Keep in mind that it is a good idea to retain a rainy-day fund that contains the funds needed to cover your total monthly expenses.

  • Get pre-qualified. — If you want to avoid the emotionally draining saga of falling in love with a house that you can’t afford, then you should get pre-qualified before you set foot in an open house.

  • Speak to your lender about various first-time homebuyer programs. — Knowing how much house you can afford will depend, in part, on your ability to receive the ideal loan. From understanding the requirements for FHA loans, to establishing your eligibility for a VA loan, to assessing the 203(k) FHA loan, your lender can help you maximize your financial opportunities so that you can comfortably afford your first house.


Mistake #2. Not Checking Credit Reports, Opening New Lines of Credit, and Failing to Correct Credit Report Errors


First-time homebuyers often forget to check their credit reports before they apply for a loan. The problem with this costly mistake is that mortgage lenders will scrutinize credit reports. They will also analyze debt-to-income ratios to assess risk and properly assign an interest rate for the loan. According to the Federal Reserve 2019 report, 90 percent of the U.S. mortgages granted in 2019 Q1 were taken out by homebuyers with a credit score of 650 or higher. Some 75 percent of U.S. mortgages applied for in 2019 Q1 were from those who had a credit score higher than 700, with a median credit score of 759. If your credit score is below 620, then you should consider resolving your credit issues before you begin your real estate journey.


Another common mistake is failing to correct inaccuracies on your credit report. Whether someone has falsely opened accounts in your name, or your credit report is displaying an inaccurate payment history, you should fix every mistake before applying for a loan. Finally, you should avoid opening new lines of credit or closing existing accounts after you have been pre-qualified. Your mortgage lender will review your credit report and debt-to-income ratio in the 30 days leading up to your closing. Any changes to your credit can result in higher interest rates, new loan terms, or even a canceled mortgage.


Mistake #3. Fixating on the “Perfect” House Over the Right Neighborhood


Every first-time homebuyer wants a house that “checks all the boxes.” However, far too often, the boxes are associated with a wish list, not a needs list. Instead of investing in a home that checks all the boxes, but is located in a less-than-ideal neighborhood, buyers should focus on the bigger picture. The right neighborhood can create the foundation needed for a positive real estate investment. As a general rule of thumb, a good real estate investment guideline is that it is “better to own the worst home in the best neighborhood than the best home in the worst neighborhood.” In other words, you can always upgrade within your neighborhood; however, you will typically have a harder time selling the most expensive house in a less-than-ideal neighborhood.


Mistake #4. Overlooking FHA Loan Requirements, Home Loans for Veterans, and USDA Loans


Have you saved up the money for a down payment? Did you remember to save extra money for closing costs? With these questions in mind, you might be surprised to learn that there are a lot of low down-payment loans that are available to first-time homebuyers. An estimated 89 percent of millennial homeowners are satisfied with their down payment, which begs the question, “Have you explored the possibility of FHA, VA, or USDA loans?”


  • FHA Loans Requirements — FHA loans typically require the homebuyer to have a 580 credit score and a 3.5 percent down payment. This loan also requires mandatory mortgage insurance that must be paid at the closing and on an annual basis. Alternatively, you might consider FHA 203K home improvement loans that will let you borrow money to improve and purchase a home all in one loan, although, as a first-time homebuyer, you might want to save the 203K FHA loan for your second or third home.

  • Eligibility for VA Loan — In order to be eligible for a VA loan, you or your spouse must be active-duty military or a veteran of the Armed Forces. This type of home loan for veterans doesn’t typically require a down payment; however, you might have to pay an established funding fee. It is important to note that there is also a cap placed on lender fees, which means that this loan can typically be an affordable option.

  • USDA(RD) Loan Facts — As its name suggests, USDA loans are typically used by buyers who are interested in owning a home in a rural area. It is important to note that the home must be within a USDA-eligible area. Additionally, you must meet certain income limits that are meant to make the loan accessible to moderate-to-low income buyers.


Mistake #5. Shopping for a House Before a Mortgage


Touring homes is significantly more enjoyable than speaking about finances. However, as mentioned in Mistake #1, if you want to avoid making the same mistakes as the millions of homebuyers who have come before you, then you need to speak with a lender before you start house shopping. Your lender will help you determine how much you can borrow, so you can spend time looking at homes that you can afford now, not homes that you can potentially afford in 20 years. To avoid making this mistake, you should be pre-qualified before you begin house hunting. You should also spend the time speaking with a local lender who knows the community inside and out. Additionally, a local lender will be readily available to answer all of your questions in person, so you can have the confidence you need as you begin and finish your homebuying journey.


Avoid Common Homebuyer Mistakes With the Help of Southwest Funding


At Southwest Funding, we believe in doing home loans right the first time. For the past 25 years, we have helped countless homebuyers discover the perfect residential mortgages for properties in the United States. From conventional loans, to VA, FHA, USDA, Jumbo, and specialty loans, we have the experience and insights needed to help you find the ideal lending situation. To avoid making one of these five homebuying mistakes, or to learn more about our down payment assistance programs, we invite you to contact Stuart Sanchez today.

Southwest Funding, Limited Partnership (NMLS #32139) is an equal housing lender. Loan product availability is subject to many factors including loan amount and qualification of borrower. Not every applicant qualifies or is eligible for every loan program. Rate and annual percentage rate (APR) calculated on a 360-day year with typical/normal closing costs. Rates and annual percentage rate (“APR”) are dependent on factors including, but not limited to: loan program selected, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms, and interest rates are subject to change without notice.

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