5 financial mistakes to avoid while home shopping

Buying a home is one of the biggest financial decisions you’ll make in your life — and the financing process is one of the largest sources of stress for many home buyers, whether repeat buyers or first-time buyers. Unless you’ve done a ton of research, getting a mortgage can feel confusing or even a bit overwhelming. The good news is, you can have a smoother and less stressful experience by avoiding these common mistakes.

1. Underestimating the full cost of homeownership

If you’re a first-time home buyer, you’re probably accustomed to the monthly cost of renting, which usually includes your rent payment, some of the utilities, and perhaps your internet and cable bills.

As a homeowner, you’ll be responsible for additional monthly costs that may have been covered by your landlord. That includes things like water, sewer and garbage bills, monthly HOAs (if you’re buying a condo), and the cost of lawn care. You’ll also be responsible for paying property taxes and homeowners insurance. And don’t forget the cost of maintenance.

If you’re a current homeowner, it’s important to consider that the costs of your new home may be higher than your current home — especially if you’re upsizing or moving into a condo with a high HOA. Plan to set aside 1-3% of the purchase price of the home annually to cover repairs and maintenance.

2. Assuming you won’t qualify

Many renters think they can’t afford to buy a house because they haven’t saved enough to pay a 20% down payment. But you might be surprised to see what kind of house you could potentially buy based on the amount you spend every month on rent. Try plugging some numbers into an affordability calculator to get a better sense of what you need — and how much you have. 

While 20% is considered ideal, you don’t necessarily need a down payment that large to buy a home. There are loan programs that cater to first-time home buyers, such as the FHA loan, which allows for down payments as low as 3.5%. Even some conventional loans allow for down payments as low as 3%. And certain loans, such as VA loans for veterans and military or USDA loans for buyers in rural areas, may not require a down payment at all.

3. Getting pre-approved at the last minute

Many home shoppers wait until they’ve found a home they want to buy before talking to a lender, but there are many benefits to getting pre-approved early. Not only can early pre-approval help you shop in your price range, but it can give you time to catch — and correct — any errors on your credit report before they cause a problem with your loan. Pre-approval letters are usually good for up to 90 days, so getting pre-approved early can also help you act fast when you find a house you want to make an offer on.

4. Only talking to one lender

Many home shoppers use a lender who was recommended by a friend, family member or real estate agent, and they don’t bother shopping around. But that doesn’t guarantee you’ll get the best rate, or even get a lender who is experienced with loans for your particular situation. The Consumer Financial Protection Bureau recommends talking to at least three lenders to get the best loan for you.

5. Spending your entire budget

When a lender provides a pre-approval letter, they’ll typically include the maximum amount they will lend you. But just because a lender will let you borrow a certain amount doesn’t mean you should finance that much. 

There are rules lenders follow to determine what you can borrow, and most will consider your debt-to-income ratio in making that determination. But buying a home also comes with significant upfront costs, such as the down payment and closing costs, so you’ll want to make sure you have savings left for emergencies and other unexpected expenses after you close on your new home.