It can be a thrill to be a first-time home buyer, but might also be a challenging experience. Unless you have done a lot of research, the home buying journey can feel overwhelming. Don’t make it even harder for yourself by making some of the most common first-time homebuyer mistakes.
Not Checking Your Credit
Your credit score is a key factor in the loan approval process. It is important to check your credit, to know your credit score. Once you understand where you stand, you can figure out if you need to improve your credit score. If your credit score is too low, you may find it hard to get approved for a home loan. Even if you are approved, the interest rate will probably be higher because of your credit history. A high-interest rate could cost you extra money in the long run.
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Not Improving Your Credit
First-time home buyers, especially with lower credit scores, should try to improve their credit. A higher credit score usually means that you have more choices for a mortgage, and you might qualify for a lower interest mortgage.
You can improve your credit in several ways:
- If you find any errors or mistakes on your credit report, file a dispute.
- Raise your available credit to lower your credit utilization.
- Reduce your debt-to-income ratio. The best way to do this is to stop using your credit cards. Come up with a payment plan that puts most of your available budget for debt payments toward the highest interest loans.
Not Get Pre-Qualified
If you want to start shopping for a new home and streamline the rest of your application, get pre-qualified for a home loan. Some sellers won’t even accept offers from buyers without mortgage pre-qualification.
Getting pre-qualified for a home loan gives you an estimate of the amount you might be able to borrow. This way, you can start your home search with an idea of your total budget and mortgage terms.
Get ahead of the game. Apply for a mortgage pre-qualification. Contact a mortgage broker to find out how to pre-qualify for a mortgage.
Fail to Establish a Realistic Budget
House shopping is an exciting time, but don’t get too caught up in the moment. Establish a budget before seriously looking at any houses – it can be painful to fall in love with something you can’t afford.
Do your homework to come up with a realistic budget. A great way to start is by calculating your monthly mortgage payment. You can use a mortgage payment calculator to experiment with various loan amounts, down payments, and interest rates.
Consider additional expenses such as private mortgage insurance (PMI), if your down payment is less than 20%.
Also, account for maintenance and repairs in your housing budget. You won’t have a landlord or property manager to handle things like paint touch-ups or appliance replacements. Having money set aside for these expenses can be a great peace of mind.
No Home Inspection
Many issues in a house’s plumbing, HVAC, and electrical systems can be hard to spot with an untrained eye. By hiring a professional home inspector, you can catch these issues before closing.
When you find issues during an inspection, you can ask the seller to fix the problems or provide a resolution to continue with the sale. If you forego an inspection before purchasing your house, these issues could pop up at any time and might cost you thousands of dollars in repairs.
Fail to Ask Your Lender Questions
Making assumptions about your home loan could cost you extra time or stress. When it comes to mortgage questions, there is no better person to ask than your mortgage professional.
You should ask your lender about loan options, closing costs, the closing schedule, and anything that is important to you. Don’t be afraid to ask questions. Your lender will be happy to answer all of your questions throughout the mortgage application process.
Fail to Shop Around for the Best Loan Options
It might be tempting to accept the first home loan offered to you, but it is best to do your homework. Do your research. Find out about current interest rates. Talk to multiple lenders before you make a decision.
Don’t assume that the mortgage offer with the lowest interest rate is the best option. You should also take into consideration things like closing costs, PMI, fixed vs. adjustable rates, down payment, and additional fees. These factors can make a big difference in your monthly mortgage payments and your new home’s final cost.
Do you have any mortgage-related questions? Contact your bank or mortgage lender to discuss your home loan options.
Mortgage Cheat Sheet: Rules To Know When Applying
Buying a home and applying for a mortgage is a serious business. Your home is one of the biggest investments you’ll ever make, if not the biggest. It is important that you do your research and understand what it takes to qualify for the best mortgage terms. I have put together a little cheat sheet with some valuable tips to help you navigate the mortgage application process. The first thing you need to do is . . .
Check your credit
Your credit score is critical factor lenders evaluate as part of your mortgage application. A low credit score is a problem. Homebuyers with low credit might be unable to qualify for a mortgage. Don’t let bad credit keep you from buying your dream home. Your credit history also impacts the terms of your home loan. A higher credit score gives you more options and a lower interest rate.
Before you begin home shopping, check your credit report. Even if you have checked your credit in the past, you should check it again before you start your home search. Credit scores can change over time, so it is best to get an up-to-date credit report to avoid surprises. When you check your credit, you can see if there are any mistakes. You can dispute errors or incorrect information and possibly boost your score before you begin the mortgage application process. Once a year, you can get a free credit report at AnnualCreditReport.com.
Understand different loan types
There are many types of home loans that you can choose from. First, you need to determine what will be the best fit for you: a fixed-rate or an adjustable-rate home loan. The interest rate is locked with a fixed-rate mortgage. Thus, the interest rate of your mortgage will be locked and will remain the same for the life of the mortgage.
If you have an adjustable-rate mortgage (ARM), the interest rate may change based on national rate indexes. ARMs have an initial fixed-rate for a set period of time, after which the rate will vary. For example, a “5/1 ARM” is a loan with a fixed rate for five years, then one yearly adjustment for the rest of the loan term.
You will also need to decide whether you want a government-insured loan or a conventional home loan. Federal Housing Administration (FHA) loans are government-insured loans. Other home loan options include United States Department of Agriculture/Rural Housing Service (USDA/RHS) loans and U.S. Department of Veterans Affairs (VA) loans.
Consider the pros and cons of each loan option and use a mortgage calculator to determine which type of loan will best meet your needs. Contact a bank or mortgage professional with any mortgage-related questions.
Get your paperwork in order.
Lenders require borrowers to submit a set of documents to process your mortgage application. Some of the required documents are a copy of your driver’s license, W2’s from current and past employers, paycheck stubs, bank statements, last two years tax returns, list of your debts and assets. Have all of this information on hand and organized to cut down on stress and help speed up the loan application process.
Get pre-qualified.
Being pre-qualified by a lender gives you an idea of how much you can afford to borrow. Before you set up a meeting with a real estate agent and begin your home search, it is best to go through with your loan pre-qualification with your mortgage broker. You don’t want to fall in love with a home, only to find out that it’s outside of your budget. Getting pre-qualified is fairly simple. You provide your lender with information about your financial situation, including income, debt, and assets. After reviewing your financial information, your lender can give you an estimate on the size of mortgage for which you qualify.
Shop around for the best mortgage rates.
Many people make the mistake of thinking that their home bank will offer them the best mortgage terms, out of loyalty and familiarity. Do your research. It is important to shop around to see who will give you the lowest interest rate with optimal terms. Just a fraction of a percentage can make a substantial difference over the life of a 30-year loan. Be sure to find out what the current mortgage rates are and see how your offers compare.
What are closing costs and how much you’ll pay?
Homebuyers need to be aware of the costs associated with closing on their home. There is a variety of closing costs when buying a house. Mortgage closing costs can be anywhere from 2% to 5% of the home value. The government has set up rules for lenders to follow in terms of closing costs. Some of the closing costs are loan and application fees, appraisal, and discount points. Additional closing costs are title insurance, title search, and inspection.
Your lender may allow you to roll some of your closing costs into your mortgage. Talk to a bank or mortgage lender and learn about your home loan options.