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4 Credit Mistakes First-Time Homebuyers Make

by: Emma Higgins

Update: 09/2021

4 Credit Mistakes First-Time Homebuyers Make

Buying a home is an intimidating process for everyone. However, first-time home buyers are likely to be even more nervous than those who have gone through the process before. As a result, there are a few key mistakes that first-time home buyers make when they are shopping for the first house or first mortgage.

Credit mistakes are never good, but credit mistakes when you’re looking to buy a home and get a mortgage can be extremely costly. After all, a home is the most expensive purchase that most people will ever make in their lives. That’s why it’s so important to get it right. You’ll have your mortgage for 10-25 years, so even small mistakes can result in you paying tens of thousands of dollars more over the course of your mortgage.

Most first-time home buyers are aware that their credit score is an extremely important factor when it comes to getting a mortgage and buying a home. However, the lack of wide-spread credit education and the myths surrounding credit and lending cause first-time home buyers to make several key mistakes with their credit. If you’re looking for your first home and mortgage, make sure you avoid these four key errors.

Challenging Everything

Disputing or challenging negative and inaccurate items on your credit report can be an incredibly effective way to raise your score. However, many consumers go overboard and start to challenge every negative item on their credit reports. Sometimes they do so on the advice of mortgage lenders, other times they are acting out of panic and instinct. Read more here: How to raise your credit score.

No matter why you’re inspired to challenge every negative item on your credit report, you should avoid the temptation for several reasons. First, these kinds of blanket challenges are largely ineffective. As a result, they waste your precious time which could be dedicated to more productive credit building strategies.

Second, credit reporting agencies rarely take blanket challenges seriously. The exception is in cases of proven identity theft, but that’s an entirely different matter. As a result, the credit reporting agency is likely to disregard all of your disputes, even on items that should legitimately not be on your credit report.

Track Credit Usage

Another mistake first-time home buyers make is that they’ll fail to track how much of their credit they’re using. Credit utilization is a measurement of how much credit you have for revolving lines of credit like credit cards, compared to how much you’re using.

While in an ideal world you won’t carry any balances on your revolving credit accounts, you can generally use up to 25% of your total credit limit without worrying too much. However, the more of your available credit you’re using, the lower your credit score will be. High credit utilization tells creditors and lenders that you’re having a hard time paying your bills, which means you may not qualify for loans or credit offers, or that you’ll only receive offers with less than favorable terms. As a result, you may find yourself making the next mistake…

Accepting the First Mortgage Offer

If your credit record is less than perfect, you may be tempted to take the first mortgage offer you get approval for. While it can be tempting to take any offer so that you can move on to your dream home, you should do the math first. If waiting three months to accept a mortgage means that you can raise your credit score, you’ll get better offers with lower interest rates. Over the course of a 25-year mortgage, an interest rate that’s just a point or two lower can save you tens of thousands of dollars.

This mistake usually occurs because people feel stressed and nervous at the prospect of building their credit, and they feel an urgency to buy a home. Usually the urgency to buy a home stems from a desire to stop paying rent to someone else and to invest in a property you own. However, taking a step back and building your credit score can more than pay for itself, and will produce a much greater savings not only over the course of your loan, but in the size of your monthly bill. As a result, you’ll have more money to save, develop your lifestyle, or spend however you see fit. Make sure the math makes sense before accepting any mortgage offer.

Not Following Through on Credit Tracking

One of the most popular and prudent approaches to house shopping involves getting pre-approved for a mortgage. Usually people who are trying to repair or improve their credit will do so before they apply to be pre-approved. Once they are pre-approved, bad habits can return, lowering your score. This situation can result in huge headaches, as your mortgage pre-approval is predicated on you having a certain credit score. If your credit score slips, then you might not find out until the mortgage provider does a final check at the closing, where you learn that you no longer qualify for the rate you had planned, or that you no longer qualify for a mortgage at all.

As you can see, most of the mistakes that first-time home buyers make regarding their credit come down to a few simple things. First, you should always closely monitor your credit score and make sure that you’re constantly taking steps to improve it. Second, whenever you’re considering any kind of financial product, you should always do the math and consider the long-term costs. It might be nice to pay a mortgage instead of rent, but if the mortgage you accept causes you to pay an extra $300 per month compared to the mortgage offer you could get if you waited a few months to improve your credit, then you’ll wind up paying an additional $90,000 over the course of a 25-year mortgage. That’s a huge amount of money which could be spent on other things in your life other than your mortgage.

In the end, if you keep your eye on the prize, remember to think long-term, and avoid these 4 common credit mistakes first-time home buyers make, you’ll get the best possible deal on a mortgage, and keep more of your money for yourself.

Emma Higgins

Emma has been helping people improve their credit scores for the past ten years and has written a number of credit repair companies reviews for us. Prior to that, she worked as a credit repair specialist and consultant for several of the best credit repair firms. She got into the credit repair industry after graduating with a degree in Finance before getting her MBA.