Top 5 Common Home Loan Mistakes First-Time Buyers Make

We review dozens of home loan applications every week, and over time, we've noticed that many first-time buyers tend to make the same critical mistakes, often without even realising it. The reality is that applying for a home loan for your first home can be a daunting task. Any errors can lead to delays, unnecessary costs, or even rejection of the loan.

So, based on what we see every day, we’ve put together the top five mistakes home loans for first-time home buyers make when applying for a home loan, and how you can avoid them. If you're planning to buy your first home, this could help you make smarter decisions right from the start.

1. Not Checking and Improving Credit Score Before Applying

The approval of your home loan application is largely determined by your credit score. Unfortunately, many first-time home buyers don’t check their credit report before applying.

Your credit score is used by lenders to assess your creditworthiness. Higher interest rates or even loan refusal may result from a low score. Common reasons for low scores include missed payments, high credit card balances, or unresolved debts.

What should you do?

Before applying for a home loan, request a copy of your credit report from a credit bureau such as Experian, Illion or Equifax and review it carefully.

A ‘good’ credit score is considered above 650 for an individual or a combined 750 for a joint application. If your credit score is lower, there may be things you can do to take action to raise your score before applying for a loan. This includes paying off debt, closing any credit cards and making on-time payments. You can obtain better loan terms if your credit score is higher.

2. Not Understanding All the Costs Involved

Many first-time home buyers focus solely on the monthly repayment amount and forget that a home loan involves other costs too. These hidden or additional expenses often catch buyers off guard.

In addition to principal and interest, other costs include:

Title search fees
Property valuation and reports
Primary bank application fees
Buyers’ agent fees
Pest and building inspections
Conveyancing fees
Legal costs and documentation
Settlement closing costs
Administration fees

The first home buyers grant in Australia can help significantly when it comes to covering the initial costs of purchasing a property. As this varies from state to state, check your eligibility and apply on your state government’s website. At Mondus Capital, we take care of many of the initial home buying costs mentioned above for up to a 2.2% contribution from the customer. While this doesn’t include stamp duty, you may also be eligible for a stamp duty exemption, which varies from state to state. If these expenses are not planned for, they can strain your finances and affect your loan approval.

What should you do?

Before applying for a home loan, create a detailed budget that includes all possible fees and costs. Consider whether the inclusion of these costs will impact your purchasing power or whether you can afford these in addition to your deposit.

It can be beneficial to consider a shared equity home loan, allowing you to increase your purchasing power. Mondus Capital covers your home deposit as well as many upfront costs, including valuation costs, buyers agent fees, conveyancing and legal fees and building inspections. Eligible Mondus customers only pay stamp duty and 2.2% of the property purchase price upfront, allowing them to get into the market without years of saving.

Many states have introduced first home buyer discounts and exemptions on stamp duty. For example, states that have an exception on stamp duty for new builds can save first home buyers between $10,000 to $30,000. You might also consider looking for a home that is below the Home Guarantee Scheme price cap, enabling eligible home buyers to buy a home with a lower deposit and avoid paying Lenders Mortgage Insurance.

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3. Applying for a Loan Without Comparing Lenders

Many first-time home buyers tend to apply for a home loan with the first lender they come across or with their current bank. This limits their options and might result in higher interest rates or less favourable terms.

Lenders can differ greatly in terms of interest rates and loan characteristics. Some may offer reduced fees, more flexible repayment plans, or lower interest rates. It's critical to compare and shop around.

What should you do?

Take the time to research multiple loan options. Use comparison websites, speak to property and mortgage experts and read reviews. Comparing home loan offers ensures you get the best deal for your financial situation.

4. Taking on New Debt Before or During the Loan Application

Lenders assess your debt-to-income ratio to decide how much you can borrow. Taking on new debt before or while applying for a home loan can negatively impact your borrowing capacity.

For example, buying a new car, opening new credit cards, or taking out personal loans during this time can increase your monthly debt obligations. This can make you appear less creditworthy and may result in your loan application being rejected or approved for a lower amount.

What should you do?

Avoid making any large purchases or applying for new credit once you have started your home loan application process. Aim to maintain a stable financial situation until your loan is approved and settled.

5. Overestimating How Much You Can Afford

It’s easy to get carried away with the excitement of buying your first home and end up applying for a loan amount beyond what you can truly afford. Lenders provide borrowing limits based on your income and expenses, but those limits don’t always reflect what is comfortable for you.

Stretching your budget too thin can lead to financial stress down the road, making it difficult to keep up with repayments or cover other living costs.

What should you do?

Be realistic about your budget. Consider not only the home loan repayments but also other monthly expenses, including utilities, groceries, transportation, and unexpected costs. It’s better to buy a home that fits comfortably within your means than to struggle financially after the purchase.

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FAQs

1. How do I avoid overpaying for my first home?

Stay within your budget and avoid getting emotionally attached to a property. Seek professional advice to ensure the property is priced fairly.

2. Should I get pre-approved for a loan before house hunting?

Yes, securing pre-approval ensures you’re looking at properties within your financial means and puts you in a stronger negotiating position.

3. What are the additional costs of buying a home?

Stamp duty, legal fees, conveyancing and building inspections are just some of the common additional costs first-time home buyers overlook.

4. What are the risks of not conducting a property inspection?

Skipping an inspection can lead to discovering costly issues after purchase. A professional inspection helps identify potential problems before you commit.

5. How do I choose the right location for investment?

Focus on areas with strong growth potential, good amenities, transport links, and long-term value prospects. Avoid being swayed by short-term trends.

Apply Smart, Buy Confidently

Buying your first home is a huge step, and getting the right home loan is a big part of that. It can feel a bit overwhelming, but by knowing about these common mistakes and taking steps to avoid them with support from property investment experts, you can make the whole process much smoother.

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The main takeaway here is to be prepared. That means checking and improving your credit score well in advance, understanding all the costs involved beyond just the monthly payment, and taking the time to compare different lenders instead of just going with the first one you see. Also, it's important to avoid taking on new debt right before or during your loan application and to be realistic about how much you can truly afford.

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By keeping these five points in mind, you'll be well-equipped to navigate the home loan process confidently. You can secure a better deal and enjoy the excitement of becoming a homeowner without unnecessary stress or financial surprises. Your dream home is within reach, and smart planning will help you get there!

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At Mondus Capital, we help you purchase a property sooner, with shared equity home loans. If you need guidance at any step from understanding your buying power, choosing the right suburb or negotiating the best deal, don’t hesitate to contact us. We support our customers step-by-step throughout the home buying process, including discovering eligibility, understanding costs, and navigating the constantly changing property market.

Remember, buying your first home isn’t just about getting approved, it’s about getting it right.

References

Government Housing and Finance Sites

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