First-time homebuyers are in a unique situation. First, you’ve never had a mortgage before, you so may not know what to look for or expect. Second, you don’t have a home with equity to sell to help you with the down payment.
It’s easy to see how first-time homebuyers can get overwhelmed and make mistakes. Keep reading to learn the top mistakes that many first-time homebuyers make so that you can avoid making them too.
Mistake: Not Checking Your Credit Report
The last thing you should do is find out from the lender that you have issues on your credit report. Looking at your credit report ahead of time will help you know what you present to the lenders. If you have negative credit information reporting, you can take the time to fix the issues before you apply for a mortgage. If you allow enough time, you may be able to increase your credit score before a lender pulls your credit.
A few things to look for include:
- Excessive outstanding credit card balances – Ideally, you should have no more than 30% of your credit balances outstanding. If your credit report shows that you have more than 30% outstanding, it’s time to pay your balances down. Having a lower utilization rate will help your credit score increase.
- Late payments – If you are behind on any of your debts, it’s worth it to get current on them before you apply for a mortgage. While the late payments won’t disappear off your credit report, you can show lenders that you were able to get back on track. Have an explanation for the late payments ready because the lender will ask.
- Too many inquiries – If you recently applied for new credit, it’s best if you wait a little bit before you apply for a mortgage. Inquiries show lenders that you are either desperate for money and are trying to get new loans or that you have new loans that aren’t yet reporting. It’s best if you don’t have any new inquiries within the last 12 months before you apply for a mortgage.
- Inaccurate information – Errors occur all of the time on credit reports. Go through your credit report line-by-line to ensure that the accounts belong to you; that the balances are correct; and that the payment history is also correct.
Mistake: Not Getting Pre-Approved
You might think that you know how much house you can afford, but will the banks agree? You won’t know until you apply for pre-approval. You should do this step before you start shopping for a home, but not too soon before. Your pre-approval will be good for around 90 days, so you should apply for them when you know you are going to start looking for a home.
The pre-approval takes into consideration your credit score, income, assets, and liabilities. Basically, the lender qualifies you for the loan based on your information. If you get approved, the approval will be dependent on any conditions the lender gives pertaining to your financial situation, but mostly on the price, condition, and status of the property you want to buy.
Once you know how much loan a lender will give you, then you can shop for a home within your price range. Shopping outside the price range will just prove to be a waste of time because you won’t be able to get financing for it.
Mistake: Not Shopping Around
When you are ready for a pre-approval, you should shop around with different lenders. While it can be exciting to hear ‘you’re approved’ from one lender, how do you know that it’s the best deal out there for you? Another lender may approve you for a higher loan amount or give you a better interest rate/closing fees.
We suggest that you get quotes from at least three lenders. This way you can compare the offers. Don’t just jump at the lender that gives you the highest loan amount either. Look at the big picture. What is the interest rate? What are the closing fees? Think about how much the loan will cost you in the end. The loan that is affordable on a monthly basis and has the lowest bottom line is the right option for you.
Mistake: Not Making a Down Payment
While there are no down payment programs out there, you may want to make at least a small down payment to give yourself some equity in the home. Without a down payment, it could take years before you see any significant equity in your home.
Not making a down payment also makes you a higher risk of default for the lender. This may make it harder for you to get approved. If you do get approved, lenders generally charge higher interest rates or closing fees to make up for the risk of you not making a down payment.
This doesn’t mean that you have to make a 20% down payment – even previous homeowners don’t always put that much down on a home. What it means is putting something down, even just the 3.5% that the FHA requires to give you a head start on earning equity in your home.
Mistake: Overlooking the True Cost of Home Ownership
First-time homebuyers often don’t realize the cost of homeownership above and beyond the cost to buy the home itself. You have to figure in regular maintenance as well as emergency repairs. Also, don’t forget about things like real estate taxes and homeowner’s insurance.
In general, you should expect your regular home maintenance to cost around 1% – 2% of your home’s value. That means a $200,000 home may cost between $2,000 and $4,000 per year to maintain. This doesn’t take into consideration any emergency repairs your home may need. If you don’t have money set aside for these issues, you could find yourself in a financial bind.
As a first-time homebuyer, there are many programs at your disposal. Before you jump in headfirst, though, you should make sure you understand the above mistakes so that you don’t make them. Avoiding these mistakes can help your journey as a first-time homebuyer be successful.