There’s nothing cheap about buying a home. From the down payment to closing costs, the home inspection to the home appraisal, you can wipe out your savings before ever touching the keys to your new home.
And that goes doubly for first-time home buyers, who can’t lean on the proceeds from selling their last home. You’re on your own to come up with the cash needed to buy a house.
While you can’t lower most of these costs, you can at least avoid paying too much because you’re a real estate newbie.
Common Mistakes First-Time Home Buyers Make
To minimize your financial pain as a first-time buyer, avoid these common home buying mistakes.
1. Not Getting Preapproved for a Mortgage
When sellers review purchase offers, they want to know more than just the offer price. They also want to know how likely each buyer is to actually make it to the settlement table and how quickly each buyer can close.
That’s why sellers often take cash offers even if they come in lower than other bids. The seller knows the buyer can close — and quickly.
If you can’t offer cash, the next best thing you can do is include a preapproval letter from your mortgage lender. In fact, your real estate agent will likely require one before submitting offers on your behalf.
Note that being “prequalified” is not the same as being pre-approved. A prequalification letter means next to nothing. It’s more of a marketing gimmick than anything else, where the lender says that they could approve you for a loan but won’t make any guarantees.
In contrast, a preapproval letter means the lender has reviewed your application and conditionally approved you for a mortgage.
Bottom line: You need to line up a lender before you start making offers.
2. Not Comparing Mortgage Lenders
Before you begin shopping for houses, you need to shop around for loans — preferably with the best mortgage lenders you can find.
First, get a sense for the best home loan program for your situation. Depending on your qualifications, you might be able to choose from conventional mortgage loans, FHA loans, VA loans, or USDA loans.
Familiarize yourself with these loan programs and related terminology, such as the difference between conforming and nonconforming mortgage loans. Once you know the best loan program or two for you, compare pricing quotes from different lenders.
While each hard credit inquiry dings your score, the credit bureaus give you a grace period while you’re shopping for a mortgage. That means that you have a certain window of time, during which all hard credit pulls count as a single inquiry.
The exact length of this window depends on the credit scoring model and score type but typically ranges from 14 to 45 days. To be safe, wait until you’re ready to get preapproved and do all your comparison shopping in the same week.
You can also consider pulling your own credit report and verbally provide your score when shopping around. Then, once you find the best fit, you can then submit a single application to get preapproved.
3. Not Checking Your Credit Report
You need to know what’s on your credit report in order to find the best home loan program for you.
Before you even start talking to lenders, pull your own credit report. Look it over carefully — not just your credit score, but the full report. Do you see any negative public records on it? Late payments or collections? Are there any errors?
If you find any errors, start the process to fix them now, before you apply for a loan.
Disclose any negative information from your credit report to lenders as you apply. Lenders want your business and will try to work with you to find a loan program that fits your credit history.
That said, your credit isn’t written in stone. Work on improving your credit score as you start your house hunt. Doing so helps you qualify for lower mortgage rates, better loan programs, and lower lender fees at settlement.
4. Applying for Other Credit at the Same Time
As outlined above, hard credit inquiries temporarily hurt your credit rating. So when you’re shopping around for a mortgage — the largest loan you’re likely to ever borrow — you want to keep your credit as pristine as possible.
That means you should hold off on applying for new credit cards or other types of loans until after you’ve closed on your home loan.
5. Overlooking the Hidden Costs of Homeownership
Owning a home comes with more costs than the typical renter realizes.
Until now, you’ve outsourced repairs and maintenance costs to your landlord. Not anymore.
When you buy a home, you start paying contractors for new roofs and furnaces, for emergency plumbing repairs, for electrical problems. And they add up: I recommend budgeting around 10% of your monthly mortgage payment for a home maintenance fund, which you can either hold separately or merge with your emergency fund. Alternatively, another rule of thumb recommends budgeting 1% of the total home price each year for maintenance and repairs. For a $400,000 home, that comes to $4,000 per year, or $333.33 per month.
You also have to furnish and decorate your new home, which may be far larger than your old apartment or rental home. Most new home buyers forget about these costs when they buy a larger home.
For that matter, you have to light it, heat it, and cool it. All of which costs more for single-family homes than apartments, and the larger your new home, the more it will cost you.
Then comes lawn care, from mowing to landscaping to gardening and beyond. You may need to buy a lawnmower, a weed trimmer, and gardening tools. Plus, if you have a patio, you’ll need furniture for that too, along with a grill.
Speaking of tools, do you own a full tool kit? If not, plan on shelling out for that as well.
Most home buyers don’t realize when they’re shopping for a home that they’re buying a lifestyle, not just a house. And lifestyles cost money, both in the initial financial investment to buy all the accouterments and the ongoing costs in labor, time, and more money. As you shop for a home, consciously think about the lifestyle you want — and what it will realistically cost you.
6. Buying More Home Than You Can Afford
All of the expenses outlined above add to the real costs of owning a home, so you need to include them when you decide on a budget.
Before you do anything else, revisit your entire monthly budget. In the context of all of your monthly expenses, how much do you want to spend on housing?
And no, you can’t decide how much house you can afford based on the maximum loan amount that lenders approve. To begin with, lenders create debt-to-income ratio limits to protect themselves against losses, not to help you set an ideal savings rate.
You have other financial goals beyond simply buying a home, such as retiring one day and possibly helping your children with their college education. It’s up to you to save and invest for these goals, regardless of how much money mortgage lenders try to shove at you.
7. Making Emotional Decisions
Remember, housing is a monthly expense, not an “investment.” Home buyers love to justify overspending on housing to buy their dream home, by telling themselves that it’s an “investment.” But investments earn you money each month, not cost you money.
The less you spend on housing, the more you can save and invest each month, and the faster you can build wealth. Reframe the question from “What’s the most I can afford to spend on a house?” to “What’s the least I can spend on housing and still be happy?” Ask the former, and you’ll spend up to your limit. Ask the latter, and you’ll buy an affordable home that doesn’t stretch your budget.
8. Not Researching the Neighborhood
You can change your house, within reason. But you can’t change the neighborhood.
Do your homework to find the right neighborhood for you and your family. Research crime rates, local schools, walkability, and neighborhood amenities.
For example, one factor that influenced where my wife and I chose to live is that we can get around without a car. We save a massive amount of money each year by not having car payments, auto insurance, car maintenance costs, or gas station bills.
Try to anticipate your needs and buy a home you can live in for at least the next five years. While you can always move later as your needs change, it costs tens of thousands to move. Remember that each home you own comes with two rounds of closing costs: one set when you buy and another when you sell.
9. Making the Wrong-Size Down Payment
Most first-time home buyers just try to get the lowest down payment possible. But that can add other costs and headaches for you.
To begin with, if you put down less than 20%, the lender charges you mortgage insurance. That can add hundreds of dollars to your monthly payment.
For conventional loans, you can remove private mortgage insurance (PMI) from your loan once you pay the balance down below 80% of the property value. But FHA loans, which are famous for allowing down payments as low as 3.5%, force you to keep paying mortgage insurance for the entire life of the loan. That adds many thousands of dollars to your loan over time.
A low down payment also raises the risk of becoming upside-down on your home. This is when you owe more on your mortgage than your home is worth.
10. Draining Your Savings
You need to maintain some savings for emergencies. Otherwise even small surprise expenses can throw you into a financial tailspin.
Many lenders even require you to keep a certain amount of money held as cash reserves when you settle.
Keep at least one month’s living expenses in your emergency savings account when you settle on a home. You’re better off with even more in your emergency savings — three to six months’ expenses if possible.
11. Overlooking First-Time Homebuyer Programs
You’d be surprised at the resources available to first-time home buyers, especially lower-income buyers.
Start with the National Homebuyers Fund, which offers grants to low-income buyers. But don’t stop there — every state offers its own grants, down payment assistance programs, and other help for first-time home buyers. The Department of Housing and Urban Development (HUD) maintains a list of local programs that can help.
Some banks also connect homebuyers with down payment grants and other assistance, such as Bank of America and Chase. Beyond the major corporate banks, also call up local community banks and credit unions, as they may offer their own local programs.
12. Overlooking FHA, VA & USDA Loans
The Federal Housing Administration designed its FHA mortgage loan specifically to help first-time homebuyers with modest incomes and less-than-perfect credit. With a credit score of just 580, you can potentially qualify for a 3.5% down payment loan. Even borrowers with credit scores between 500 to 579 can qualify for just 10% down.
Just beware that you’ll end up paying mortgage insurance for the entire life of the loan. That adds an unavoidable cost that conventional mortgage borrowers don’t have to pay.
For military veterans, it’s hard to beat VA loans. These come with an unbeatable 0% down payment, for qualifying borrowers. It remains an outstanding perk of serving.
Buyers in rural areas can also take advantage of 0% down payment loans through the U.S. Department of Agriculture (USDA).
13. Not Budgeting for Closing Costs
Closing costs add up to thousands of dollars when you buy a home.
From lender fees to title company fees, transfer taxes to government recording fees, expect to open your wallet wide at closing. Lenders do provide a Good Faith Estimate document early in the loan process that breaks down expected closing costs. Unfortunately, these costs often rise before closing.
But you can ask for a seller concession when you make your purchase offer. In this way, the seller can cover your closing costs, reducing your out-of-pocket expenses. However, in a seller’s market, it’s far from guaranteed a seller will go along. Ask your real estate agent if it’s wise to incorporate seller concessions into your contract offer and negotiation strategy.
14. Not Budgeting for Moving Costs
Even if you rope some friends into helping you move, you can still expect hundreds of dollars in truck rental costs and pizza delivery.
If you pay a moving service, plan on spending thousands rather than hundreds.
It’s one more expense that most people fail to consider until moving day arrives. So they whip out their credit card and dig themselves into a hole they can’t really afford.
Before you even start your house hunt, budget for moving expenses. Research truck rental costs or moving company costs, then set aside money for your moving expenses separately from the funds you’ve saved for your down payment and closing costs.
15. Skipping a Home Inspection
Yes, home inspections cost you hundreds of dollars. And they’re worth every penny.
You need to know what you’re getting yourself into when you buy a home. Home inspectors spend hours poking and prodding the property, looking behind every access panel, peering into every nook and cranny. They report back to you with the condition, age, and remaining life expectancy of every mechanical system and utility in the property. That includes plumbing, electrical, heating, cooling, septic, and more.
Home inspectors also look for hidden problems such as mold, foundation issues, or structural problems. These are the sorts of nightmares that can cost you tens of thousands later on if you discover them after settlement rather than before.
Never, ever skip the home inspection. Talk to your real estate agent about home inspection contingency clauses before seeing homes. If they say that the local market is so hot that sellers are rejecting these clauses, consider taking a home inspector or other home improvement expert with you when seeing properties. To avoid paying someone to tour every house with you, you can bring them on second viewings only.
And don’t just glance over it, once you receive it. Read it cover to cover. If you see any surprises, approach the seller to ask them to either lower the price accordingly, pay for repairs, or release you from the contract of sale.
As you set a housing budget and explore your options, consider getting creative.
One of my favorite budgeting tricks is house hacking, which involves using your home to generate income to offset your housing costs. The classic model involves buying a multifamily property and renting out the other unit or units, so the rents cover your mortgage payment. But you can also rent to housemates, set up a basement or garage apartment, build an external accessory dwelling unit (ADU), or rent part of the home out on Airbnb. A friend of mine even rented out her garage as storage space to help cover her housing costs.
If you look into saving money by buying a foreclosure or a fixer-upper, stick with cosmetic improvements unless you have a background in home improvement. Mechanical systems and structural problems can come with all kinds of unexpected headaches, including permits.
Buying a home will cost you more than you realize, so budget extra for surprise expenses. When in doubt, spend less rather than more on a home.