First Time Buying a Home? Avoid These 6 Common Mistakes

Mistakes are learning opportunities, but it’s safe to say that buying a home is something you’d want to get right the first time. Luckily, living in the information age means we all have the opportunity to learn from others’ mistakes. Here you’ll learn the most common missteps first-time homebuyers make and how to make sure you don’t follow in their footsteps.

1. Waiting until you have a 20% down payment
2. Comparing real estate apps, but not real estate agents
3. Shopping around for the home, but not the mortgage
4. Finding a home, but ignoring the neighborhood
5. Applying for a mortgage, but not first-time homebuyer assistance programs
6. Buying more home than you can comfortably afford

And finally, the right way to buy your first home.

1. Waiting until you have a 20% down payment

In August 2021, almost 3 out of 4 first-time homebuyers bought their homes with a down payment less than 20%. The median down payment for first-time homebuyers who financed their home purchase was just 7%. And given rising property values around the US, it’s not surprising that so many first-time homebuyers are wanting in on the action.

Buying property sooner may allow you to take advantage of low-interest rates and get a better deal on a home before the price of the home you’re interested in goes up. Plus, as a new homeowner, you’ll start building home equity earlier as property values go up. Home equity is the value of your home, minus the amount of money left on your mortgage. Your home equity increases when property values rise and as you pay off the principle of your loan. So instead of waiting until you have a full 20% down payment, it can be in your best interest to take the plunge sooner. Keep in mind that any down payment is an individual financial decision. There are also benefits to waiting until you have the cash for a 20% down payment—avoiding private mortgage insurance is one of them.

Making a down payment of less than 20% may also make financial sense if you need to keep some money in reserve as a cash cushion. Closing on a home typically involves closing costs, moving costs, and for many, unanticipated expenses relating to the home itself. That extra money you’ve kept aside, by not putting it toward your down payment, will give you some breathing room if push comes to shove.

Once you’ve settled in and are more comfortable managing your new home’s ongoing expenses, you’ll most likely have the option to make additional mortgage payments. Making mortgage prepayments is a common tactic homeowners use to reduce the amount of interest they’ll pay over the life of their loan. But, be sure to speak with your lender beforehand as some companies charge a mortgage prepayment fee. (Better Mortgage loans do not have any prepayment penalty fees.)

2. Comparing real estate apps, but not real estate agents

Before you start going to open houses, you should have a real estate agent by your side. A buyer’s agent represents your interests and gives you access to information, properties, plus deep knowledge about the neighborhood. While it may seem like a timesaver to work with an agent your friend used, one you met at an open house, or a realtor your favorite real estate app suggested—in the long run, you want an agent that’s the best match for you.

It’s worth your time to interview a handful of agents to find a professional who you enjoy working with. Buying your first home can be a surprisingly emotional experience, and you’ll want someone who’ll be advocating for you every step of the way.

Some helpful questions to help you determine if you’ve found a good match include:

• How do you communicate with homebuyers, and how quickly do you respond to messages?
• How much information—including your own opinion—do you typically share with homebuyers?
• Who do you have working on your team?
• How will you negotiate on my behalf?
• What are some ways to make my offer more attractive besides just increasing the price?

A buyer’s agent from Better Real Estate is a partner who’ll work with the entire Better family—Better Mortgage, Better Cover, and Better Settlement Services—to make your first homebuying experience seamless. Better Mortgage saves homebuyers an average of $8,200¹ over the life of their loan. Better Cover can give you homeowners insurance quotes in seconds, and when you find the right policy, they’ll help you finalize it.

Better Settlement Services has the inside track on title and settlement services to make it easier for you to close on schedule.

You may also be able to take advantage of the Better Cash Offer program² to make your offer more attractive to sellers³. The Better Cash Offer program enables qualified homebuyers in select markets to make an all-cash offer on the home they want. All-cash offers can make your offer 4x more likely to win a bidding war.

3. Shopping around for the home, but not the mortgage

There are as many mortgages to choose from as there are homes on the market, if not more. And yet, according to the 2019 National Survey of Mortgage Originations, 50% of homebuyers looked at only one lender before applying for a mortgage. By comparing the offerings of 5 lenders before applying, homebuyers could save more than $400 in interest payments in their first year alone.

Lenders tailor the mortgages they offer to each homebuyer’s unique financial situation. Each lender has its own mortgage eligibility criteria. Shopping around for a mortgage lets you see a range of loans you qualify for and gives you the best chance to find a lower interest rate. Complete a lender’s pre-approval process, and you’ll receive a loan estimate within 3 days. (A Better Mortgage pre-approval takes as little as 3 minutes, and you’ll receive a loan estimate within seconds.)

If you work with a Better Real Estate Agent and get a home loan from Better Mortgage, you’ll qualify for additional savings including $2,000 off closing costs.⁵

4. Finding a home, but ignoring the neighborhood

Real estate apps offer so many details about the property you plan to buy it’s easy to forget that you’re also buying into a neighborhood. That means the streets, the schools, the people, and the hustle and bustle (or lack thereof) will have an outsize influence on your enjoyment of your new home. Take some time to explore the community. Ask around to get a feel for the neighbors. Consider the kind of lifestyle you want to lead. Decide what’s most important to you: Cute coffee shops within walking distance? Top-rated schools? Public parks or hiking trails?

Property taxes are another essential factor in buying into a neighborhood. Property taxes vary by city, county, and state. Lower property taxes leave you with more wiggle room to buy a higher-priced home. For example: If you purchase a $300k house in a county with a 3.5% tax rate, you may find yourself with the same monthly mortgage payment as a $350k house with a 3% tax rate in the county next door.

Your favorite real estate app will likely give you a rough estimate of the kinds of ongoing property taxes you may have to pay. Something to keep in mind is that some areas reevaluate property tax amounts when a home changes ownership. If you’re looking to buy a fixer-upper to renovate, your property taxes may also increase once the renovation is complete.

5. Applying for a mortgage, but not first-time homebuyer assistance programs

Owning a home isn’t just good for you. Homeownership also promotes ”higher participation in civic and volunteering activities, improves health care outcomes, lowers crime rates, and lessens welfare dependency,” according to the National Association of Realtors 2016 report on the social benefits of homeownership and stable housing. With that in mind, it’s not surprising that many states and local governments offer assistance to first-time homebuyers.

First-time homebuyer assistance programs offer grants towards down payment or closing costs, closing fee or down payment assistance, and loans with deferred payments, interest savings, or even loan forgiveness.
The US Department of Housing and Urban Development (HUD) has prepared this list of states that offer homebuyer assistance programs.

Popular loans among first-time homebuyers include FHA loans and HomeReady loans. USDA loans are helpful for borrowers in rural areas with low or moderate incomes. VA loans offer loans with lower interest rates and zero down payment to active-duty military, veterans, and their spouses. Homebuyers who work in public service may qualify for 50% off a home in what’s known as a “revitalization area” through the Good Neighbor Next Door program.

6. Buying more home than you can comfortably afford

The maximum you’re pre-approved to borrow, for most people, is unlikely to be the maximum amount you should spend on a home. “But the lender checked my finances; surely they know what they’re doing?!” To approve your mortgage, lenders typically check your credit score, debt-to-income ratio, and loan-to-value ratio. Unfortunately, lenders don’t have a crystal ball. Not accounting for future plans is where some first-time homebuyers get into trouble.

Are you thinking of a career change (which could lower your income)? Are you hoping to expand your family (which would mean you’ll have more mouths to feed)? Do you have plans to remodel your entire home (which could increase your property taxes)? Life plans that could increase your expenses or reduce your income can significantly impact how affordable your mortgage will be in the future.

The amount you set aside for your monthly mortgage payments should cover your loan principal, interest, property taxes, and insurance (plus HOA fees if you’ve bought into a condo or community that charges them). This free mortgage calculator can help you crunch the numbers.

The 28% rule and the 35/45 rule are two popular guidelines to help you decide on a mortgage budget that will keep you living comfortably as your future plans become reality. The 28% rule states that you should spend up to 28% of your gross monthly income on your monthly mortgage payment. The 35/45 rule states that your monthly payments toward your total monthly debt should be no more than 35% of your pre-tax income or no more than 45% of your monthly after-tax income.

You’ll also need to make sure you can set aside some funds for home maintenance or emergency repairs. A good rule of thumb is to budget for 1%–3% of your home’s purchase price for maintenance costs and save a portion of this amount each month. That way, if the roof caves in or the furnace gives out in the dead of winter, you’ll have cash on hand to get everything fixed.

The right way to buy your first home

Now that you know what not to do let’s look at the right way to go about it. At the end of the day, it comes down to being financially and mentally ready to own a home. That means understanding the pros and cons of buying a home then calculating mortgage costs and how they will affect your monthly budget. This definitive homebuying checklist will walk you through every step you’ll need to take to buy your first home.

Wherever you are on the path to homeownership, it’s essential to know how much home you can afford. In as little as 3 minutes, Better Mortgage can show you how much you’re likely to be approved for and match you with a home advisor to talk through your options.

¹The average lifetime savings estimate is based on a comparison of the Freddie Mac Primary Mortgage Market Survey’s (PMMS) 30-year fixed-rate mortgage product with Better Mortgage’s own offered rate for a comparable mortgage product between Jan ‘20 - Dec ‘20. PMMS is based on conventional, conforming fully-amortizing home purchase loans for borrowers with a loan-to-value of 80 percent and with excellent credit. Better Mortgage’s offered rate is based on pricing output for a 30-year fixed-rate mortgage product with a 30-day lock period for a single-family, owner-occupied residential property and a borrower with excellent (760 FICO) credit and a loan-to-value ratio of 80 percent. Individual savings could vary based on current market rates, property type, loan amount, loan-to-value, credit score, debt-to-income ratio and other variables.

²Terms and Conditions apply. See Better Cash Offer terms and conditions.

³Results based on a survey of 104 real estate agents in competitive markets. Of those surveyed, more than ~60% responded that waiving the appraisal contingency could increase the likelihood of having a competitive offer accepted by 50% or more. Results may vary and are not intended to represent or guarantee that anyone will achieve the same or similar results.

⁴Results based on a survey of 104 real estate agents in competitive markets. Of those surveyed, more than ~60% responded that waiving the appraisal contingency could increase the likelihood of having a competitive offer accepted by 50% or more. Results may vary and are not intended to represent or guarantee that anyone will achieve the same or similar results.

⁵Terms and Conditions apply. See Better Real Estate refund terms and conditions.

⁶See Better Real Estate discount terms and conditions.

¹The average lifetime savings estimate is based on a comparison of the Freddie Mac Primary Mortgage Market Survey’s (PMMS) 30-year fixed-rate mortgage product with Better Mortgage’s own offered rate for a comparable mortgage product between Jan ‘20 - Dec ‘20. PMMS is based on conventional, conforming fully-amortizing home purchase loans for borrowers with a loan-to-value of 80 percent and with excellent credit. Better Mortgage’s offered rate is based on pricing output for a 30-year fixed-rate mortgage product with a 30-day lock period for a single-family, owner-occupied residential property and a borrower with excellent (760 FICO) credit and a loan-to-value ratio of 80 percent. Individual savings could vary based on current market rates, property type, loan amount, loan-to-value, credit score, debt-to-income ratio and other variables.

⁴Results based on a survey of 104 real estate agents in competitive markets. Of those surveyed, more than ~60% responded that waiving the appraisal contingency could increase the likelihood of having a competitive offer accepted by 50% or more. Results may vary and are not intended to represent or guarantee that anyone will achieve the same or similar results.

⁵See Better Real Estate discount terms and conditions.