6 Common Mistakes First Time Home Buyers Make When Applying for a Home Loan

6 Common Mistakes First Time Home Buyers Make When Applying for a Home Loan

The journey to becoming a first-time homeowner is both exciting and full of important decisions. Among the most crucial is securing a home loan that suits your financial situation and goals. However, navigating the Australian real estate market and loan landscape can be complex, and there are several common mistakes that first time home buyers should be aware of to ensure a smooth loan application process.

6 Mistakes First Time Home Buyers Make

Mistake 1: Neglecting Credit Report Review

Your credit score plays a significant role in determining your eligibility for a home loan and the interest rate you’ll receive. Failing to check your credit reports for errors or unpaid debts can lead to surprises that may impact your loan application.

How It Works – The Unseen Debt 

Alex, a marketing executive, excitedly begins the home buying process without checking their credit reports. Unrecognised to Alex, an old unpaid debt from years ago resurfaces on the report. This oversight leads to a lower credit score than expected, resulting in a higher interest rate for his loan.

The Repercussions:

While Alex is able to secure the loan, the higher interest rate results in monthly repayments in compared to the lower interest rate that he would have paid with a better credit score and a lower interest rate. Over the life of the 30-year loan, Alex ends up paying more in interest for his loan.

Mistake 2: Skipping Pre-Approval

Before you start house hunting, obtaining pre-approval for a home loan is essential. Pre-approval gives you a clear understanding of your budget and strengthens your position as a serious buyer in the competitive Australian housing market.

How it Works – The Unrealised Limit

Sophie, a young professional, falls in love with a charming townhouse and promptly makes an offer without obtaining pre-approval. Unfortunately, Sophie’s desired loan amount of $500,000 exceeds her pre-approved limit of $450,000.

The Repercussions:

Sophie’s offer is declined, and she misses out on the townhouse. Had she secured the pre-approval, Sophie could have focused on properties within her budget and avoided disappointment. Her dream of owning a home in that location is temporarily delayed.

Mistake 3: Underestimating Stamp Duty

Stamp duty is a substantial cost associated with buying a property in Australia. Failing to account for this expense in your budget can result in financial strain during the home buying process.

How it Works – The Unexpected Expense

Chris, a dedicated teacher, has saved meticulously for his first home. He identifies the perfect starter house and is ready to close the deal. However, when faced with the stamp duty costs of $18,000, Chris realises he hadn’t budgeted sufficiently for this expense.

The Repercussions:

Chris experiences delays in finalising the purchase as he scrambles to raise the additional $18,000. This situation not only causes stress but also risks the property purchase itself, putting his dream home at risk.

Mistake 4: Overlooking Lender’s Mortgage Insurance (LMI)

If your deposit is less than 20% of the property’s value, you’ll likely need to pay LMI. Not factoring in LMI can lead to unexpected additional costs in your home buying journey.

How it Works – The Unexpected Insurance

Olivia, a compassionate nurse, excitedly secures her first apartment with a 10% deposit of $30,000. However, she is surprised by the added cost of Lender’s Mortgage Insurance (LMI), amount to $6,000 due to her lower deposit.

The Repercussions:

With LMI added to her mortgage, Olivia’s monthly payments increase to a higher monthly repayment. This unexpected expense not only affects her monthly budget but also accumulates to an additional amount paid over the life of the 30-year loan.

Mistake 5: Failing to Understand Loan Types

Australian first time home buyers have options when it comes to loan types, including variable rate loans, fixed rate loans, and split loans. Not comprehending the implications of these choices could lead to less favourable loan terms.

How it Works – The Interest Rate Dilemma

Emma, a diligent lawyer, encounters different loan types and their implications. Not fully comprehending the differences, she chooses a fixed rate loan at a higher interest rate for her loan, aiming for stability.

The Repercussions:

As interest rates drop to a lower rate Emma realises her fixed interest rate is significantly higher. Her decision costs her an additional amount  in interest payments over the fix period loan compared to what she would have paid with a variable rate loan.

Mistake 6: Disregarding Ongoing Home Ownership Costs

Homeownership comes with ongoing expenses such as property maintenance, homeowners association fees, and utility bills. Failing to budget for these costs can strain your finances after moving in.

How it Works – The Unforeseen Costs

Michael, a tech-savvy professional, meticulously budgets for his mortgage payments per month. However, he overlooks the ongoing expenses such as maintenance, repairs, and homeowners association fees, which collectively amount to an average of $300 per month.

The Repercussions:

Michael’s finances are strained by the unexpected ongoing costs, forcing him to allocate an additional $300 per month that he hadn’t accounted for. This unexpected financial burden impacts his overall financial stability and could lead to cutbacks in other essential expenses.

In Conclusion

Your journey to homeownership involves critical decisions, especially when it comes to securing a home loan. The scenarios we’ve explored highlight common pitfalls Australian first-time buyers might encounter. To ensure success, seek advice from local experts who understand the nuances of the market. At Property Point Group, our tailored services provide the guidance you need to make informed choices throughout the process.

Every individual’s financial situation is unique, underscoring the importance of thorough research and careful planning before embarking on your home buying journey. With the right insights and professional support, you can confidently transform your aspiration of owning a home in Australia into a rewarding reality.

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