5 Common Mistakes for Minnesota First-Time Home Buyers to Avoid
Updated: Oct 20
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Prospective home buyers in Minnesota have a lot to balance in their pursuit of becoming a homeowner.
Expensive real estate, high interest rates, and a relative lack of inventory on the market are just three factors working against buyers/
First time buyers trying to save their first down payment have it even harder. With all of these challenges to overcome, it isn't surprising to see buyers make tactical and strategic mistakes when buying homes.
This is where we come in. Here are 5 of the most common mistakes that first-time home buyers in Minnesota make, and how you can avoid making them yourself.
Related: A Guide for First-Time Home Buyers
Buying your first home in Minnesota
First-time buyers in Minnesota face an interesting real estate market, with high interest rates, expensive prices, and limited supply. In fact, by some metrics, the housing shortage in the Minneapolis/St. Paul area is the worst in the entire country.
But with an average Minnesota home value of $330,000, there is still some value for buyers willing to play the long game, as well as be flexible on location and features.
And with remote work more popular than ever, there is an opportunity to relocate to more remote areas of The Land of 10,000 Lakes.
Down payment
First-time buyers in Minnesota will most likely need to save a down payment to put towards their first home purchase. Various home loan programs and preferences may call for anywhere between a 0-20% down payment.
Here are popular estimated down payment amounts based on the average home price of $330,000:
3.5% down payment (FHA loan requirement): $11,550
10% down payment: $33,000
15% down payment: $49,500
20% down payment: $66,000
5 mistakes for first-time home buyers to avoid
Here are five of the biggest mistakes for Minnesota's first-time home buyers to avoid making:
Picking the wrong type of home loan
Wrong sized down payment
Buying in the right location
Neglecting down payment assistance programs
Ignoring the Minnesota Housing Start Up program
1. Picking the wrong type of home loan
First-time home buyers oftentimes just pick Conventional home loans because they are what is most common. In reality, there are plenty more options, including:
Conventional 97
FHA loans
USDA loans
VA loans
Conventional 97
Minnesota's first-time buyers may opt for a Conventional 97 mortgage, a mortgage program that requires a down payment of only 3% and allows for private mortgage insurance (PMI) to be cancelled once you hit 20% equity. They are intended to be a competitive alternative to FHA loans, since FHA loans don't currently allow for PMI to be cancelled.
They also carry less upfront fees than FHA loans, and carry the following terms and program guidelines:
Fixed-interest rates
Loan amounts below $647,200
The property must be used as a primary residence.
FHA
Approved Minnesota lenders may also offer Federal Housing Administration (FHA) loans, which are reserved for those that have never purchased a home before and require a 3.5% down payment.
Eligible borrowers will:
Have a credit score of at least 580
Have a debt-to-income ratio of less than 43%
Have steady income and employment
USDA loans
Middle income and below Americans that buy homes in USDA designated rural areas may qualify for a home loan through a United States Department of Agriculture program.
USDA loans are known for their ability to help borrowers with minimal or zero down payment.
And large areas of rural Minnesota qualify for the program! You're likely eligible if you:
Are a U.S. citizen or non-citizen national
Agree to occupy the purchased home as your primary residence
Meet income requirements in your area (cannot exceed 115% of the median household income in your area)
VA loans
Veterans, service members, and surviving military spouses in Minnesota may be eligible to utilize VA home loans to finance their new homes.
And there are many benefits to doing so:
Competitive interest rates offered
Lower closing costs
No need for private mortgage insurance (PMI)
No down payment required
VA mortgages are not just reserved for first-time buyers either!
2. Wrong-sized down payment
Another common mistake for first-time buyers is saving the wrong sized down payment. The home loan you choose could play a role, but so could some or all of these factors:
The home loan you take
The purchase price of your home
Whether you live in a high or low tax community in Minnesota
Some buyers want to save up as large a down payment as possible to limit their future mortgage payments and interest expenses. But by doing so, you could leave yourself too little cash savings in case you encounter emergency expenses.
But by extending yourself a little on the purchase price of your home, this may not be possible.
Ultimately, to decide how large of a down payment you'd like to make, you should balance the potential interest savings, versus any estimated return you could earn by investing the money instead.
Don't forget to factor in any PMI you may need to pay too.
3. Buying in the wrong location
You don't want to buy a home, only to find out twelve months later that you have the perfect home in the wrong city, town, or county. Avoid this mistake by:
Evaluating the school system if you have children
Checking the real estate taxes to avoid surprises
Doing any other due diligence you can think of
This can be harder to do in states as large as Minnesota.
4. Neglecting MN down payment assistance programs
Minnesota provides a couple of great down payment assistance programs to help out qualifying home buyers. For whatever reason, many buyers either don't know about these programs or opt to not use them when they can help.
Minnesota Housing Deferred Payment program
The Deferred Payment program is intended to help new homeowners to more easily make a down payment or handle closing costs on a home. There are two iterations of this program:
Deferred Payment Loan (DPL)
Deferred Payment Loan Plus (DPL+)
The DPL program can be paired with MN Start Up, and can provide you with up to $12,500 to use towards the down payment on your new home. DPL+ comes with a slightly higher maximum award, $15,000, and has some additional targeting criteria to use the program.
Other eligibility requirements are the same as with the Start Up program.
MN Housing Monthly Payment Loan (MPL) program
The second program to aid in your down payment or closing costs is the Monthly Payment Loan (MPL) program. Offering up to $17,000 in assistance, the MPL program is available to those utilizing a MN Housing mortgage loan and is structured as a second mortgage that will carry the same interest rate as your primary mortgage.
Furthermore, this second mortgage will have a term of ten years and you will make a fixed payment over ten years to repay the assistance that you received.
If you sell, refinance, or transfer the home's title before you pay off your second mortgage, it will become due in full.
5. Ignoring the MN Housing Start Up program
Minnesota Start Up is a homebuying program established only for those that either:
Have never owned a home before
Have not owned a home for at least the previous three years
Start Up offers mortgage loans with lower interest rates via conventional, FHA, USDA, and VA as long as you use a lender approved by Minnesota's Housing Finance Agency. These loans can then be paired with other state down payment or closing cost programs.
Prospective borrowers will need to meet the following eligibility requirements as well:
Not exceed program income requirements (between $117,300 and $134,800 depending on your household size and county of home purchase)
Buy a home below the maximum purchase price ($349,500 or $372,600, depending on the county)
Meet program minimum credit requirements
Have a minimum 3% down payment (for conventional loan)
Complete a home buyer education course
Conclusion
Becoming a homeowner in Minnesota is no small feat, and the process is littered with potential mistakes.
But by paying attention to these five common mistakes that trip first-time home buyers up, you'll be able to find and buy your home in as stress-free a way as possible.
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