If you’re thinking about buying your first home, you’re probably wondering where to start.
First time home buyers make mistakes all the time.
This article is focused on the common mistakes made and how you can avoid the same pitfalls.
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Most important steps when buying your first home:
- Get a copy of your credit report.
- Correct any errors
- Get a pre-approval letter.
- Hire a real estate agent
- Submit an offer
1. Buying a home that’s too expensive
One of the more common mistakes first-time homebuyers make is buying a home that’s too expensive for them. How much you can afford depends on your debt-to-income ratio. The maximum DTI ratio is 41% for most mortgages, but the ideal DTI is 36%.
Keep in mind there are other costs associated with a mortgage. You have insurance, property taxes, HOA dues, and landscaping.
2. Not leaving room in the budget for other expenses
Owning a home is much different than renting one. If something breaks, you have to fix it. Various items are always needing to be replaced in a home. Make sure you leave enough wiggle room to save some each month in case you need it.
3. Not hiring a Realtor
Some first-time buyers believe they don’t need a real estate agent or using the seller’s agent. You always want to have an experienced agent on your side, working on your behalf. It’s important to note that you do not pay your realtors commission. It’s paid by the seller and is built into the purchase price.
You will not save money by not using an agent; in fact, it could cost you thousands of dollars and potentially the home.
4. Not rate shopping with multiple lenders
One reason people choose not to shop for lenders is having multiple inquiries on their credit reports. FICO, the credit scoring company, allows for multiple inquires from lenders within a 30 day period. This is known as rate shopping. This is so consumers can shop lenders for the best rates without affecting their credit score.
It’s best to get loan offers from at least 4 to 5 lenders. Comparing the interest rates and closing costs can help you ensure you get the best rates on your next mortgage.
Not only will shopping lenders help you get the best rate, but you will also get more advice from loan officers and get a feel for who you prefer to work with and the best mortgage lender for your situation.
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5. Not searching for first-time homebuyer programs or grants
There are many Government programs for first-time buyers; all you have to do is look in the right places. You can search the HUD website to find state programs. You can also search on your city and county websites to find grants and programs for first-time buyers.
These programs usually offer down payment assistance or help pay closing costs. While not everyone qualifies for these programs. It’s worth taking a look into before going through the mortgage process.
6. Putting too much or too little down
The down payment is one of the biggest hurdles to homeownership first-time homebuyers have. Putting too much money down and run the risk of using up all of your savings and being cash poor. You want to make sure you still have a comfortable nest egg in case you need it.
However, if you have large savings and can afford a 20% down payment, you can avoid PMI. Mortgage insurance can be as high as 1% of the loan amount annually. By putting 20% down, you can avoid PMI, which leads to big savings.
7. Lying to their loan officer
Your loan officer is on your side. Withholding information or not being completely truthful can delay or cancel closing. If you don’t have tax returns or have pay stubs, it’s best, to be honest. The loan officer will guide you through what steps you need to correct things the right way.
8. Not looking into all mortgage options
There are many types of home loan programs out there. Maybe one loan officer is pushing you into a program that’s not the best fit for you. Speaking to more people gives you more information to choose the right type of mortgage and lender.
Jumping into getting a mortgage without doing all of your research is a recipe for disaster: some great conventional loan programs, some like the conventional 97 program with a 3% down payment.
However, most conventional loans will require a 5% – 20% down payment. If you’re not putting 20% down, you will be required to pay mortgage insurance. FHA loans were created to help more increase homeownership in America by making mortgages easier to attain.
FHA requires just 3.5% down and a 580 or higher credit score. These loans are perfect for first time home buyers with bad credit and smaller down payments.
9. Not maximizing their credit score
Your credit score is directly tied to your interest rate and how good a deal you get on your mortgage. First-time buyers sometimes fail to make sure their credit score is as high as possible.
If you can improve your credit score by as little as 20 points, it can have a big impact on your interest rate, potentially saving you thousands of dollars in interest.
Ways to improve your credit score before applying for a mortgage
- Pay down your credit card balances.
- Not applying for any other types of credit
- Not missing any payments.
- Contacting collection agencies if you have collection accounts
- Not closing any accounts.
10. Not being organized and prepared
The home buying process involves paperwork. Lots and lots of paperwork. You will need to have many documents gathered together for your lender. From W2’s to tax returns and bank statements. They will typically need about 3 months of bank statements to track where your down payment is coming from.
Not being organized and having these documents ready for the loan officer can delay your closing.m his mortgage document checklist will give you an idea of what you need. Try to gather as many of these documents as possible to be prepared.
First-time homebuyers can learn from the mistakes of those before them.
By making sure you’re pre-approved before you start searching for a home, comparing lenders, knowing all of your options, and being truthful, you can avoid making the same mistakes.