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6 Mistakes First-Time Homebuyers Should Avoid
Buying a home is both a very exciting and sometimes stressful experience. You are trying to find the right home, and you also also need to find the right mortgage. Because interest rates are rising, finding an affordable home may be difficult. Before you start house shopping and thinking of making offers, make sure your financing needs are met first. This includes checking your credit report for your credit history, credit score, debt-to-income ratio, and overall financial picture to see if lenders will approve you for a home loan.
If you are a first-time buyer, you may not be familar with the home purchasing process and this often results in making mistakes when buying a home. Here are 6 common mistakes first-time homebuyers should try to avoid.
1. Not knowing your credit
If you or your spouse have any credit issues, such as late payments, debt collection actions, or significant debt, mortgage lenders might not offer you the best interest rates and terms. This can lead to frustration and push back your timeline for buying a house. To help avoid problems down the road, you should check your credit report before starting your new home journey. Make sure to look for any errors and mistakes in your credit report. If there are any issues, reach out to the reporting agency and creditor, and be sure to include any supporting documentation to help them understand the error or mistake.
If you find any negative items on your credit reports, such as late payments or delinquent accounts, there is no way to remove them quickly. Unfortunately, these items will stay on your credit report, generally for 6 years. However, by paying your bills on time and making more than the minimum monthly payments on debts, you can boost your score and improve your chances of being approved for future loans. Always be patient when trying to repair or improve any credit score.
2. Starting your home search before talking to a mortgage broker
If you’re looking to purchase a home in a hot market, be prepared to submit an offer quickly. Often times sellers are competing for homes, and won’t consider an offer from a buyer who does not have a pre-approval. Even if there are no other offers, a buyer who is not pre-approved can be a red flag to a seller. Mortgage pre-approvals show the seller that the buyer has the ability to afford their home because the lender investigated your ability to repay your mortgage and bills based on your credit history and score.
Ultimately, unless you have a pre-approval letter from your lender, you will not be taken seriously when trying to buy a home. A pre-approval letter explains the loan amount that you are qualified for, the interest rate you are approved for, the details of your loan, and your estimated down payment amount. The pre-approval letter also includes an expiration date, usually within 90 days.
3. Going to your bank for a mortgage
Many people use a broker to get the best interest rate on their investments. Choosing a mortgage lender is important, as you can save money by shopping around. By comparing interest rates, closing costs, and lender fees, you can get the best deal for your situation. A mortgage officer from a bank typically only represents the products their institution offers.
A mortgage broker is not tied to one single lender and is paid a referral fee by the lenders. Mortgage brokers have access to many different lenders and will work with you to find you a mortgage that works best for your specific situation. Nearly half of buyers in 2019 used a mortgage broker to negotiate their mortgage.
It may be worth looking into some direct lenders, either online or in-person, to see what they offer. Remember that mortgage brokers can help you find the best rates on a mortgage, and they can also help you compare different lenders. A mortgage calculator can be helpful in budgeting. Click here to use our mortgage calculators.
4. Using your credit for large purchases
Just as credit checks can impact your credit score, so can running up your existing accounts. It is very important to keep your credit and finances as stable as possible before and after applying for a mortgage. If you have to make a large purchase, consider using cash or delaying until after you close on your new home. It is also important to understand your budget and how you will be able to handle your new homeownership costs.
5. Changing jobs
Changing your employer can affect your loan approval. Lenders consider a borrower’s employment history and income when considering whether to approve or deny a mortgage. If your income is less predictable because of a job change, this could be a red flag for your loan officer. Loan officers may want to know if you have any alternate sources of income or if you can afford to make the changes in mortgage payments that would result from the new salary.
If you decide to change jobs while buying a house, you’ll have to notify the lender and provide details about the switch. In some cases, the new job could be beneficial to your loan application; but it may also jeopardize your closing. Make sure to speak with your mortgage broker before changing jobs to ensure that you are not put in a bad place.
6. Purchasing a home that you can’t afford
When a lender tells you that you can borrow up to $450,000, it’s important to remember that this amount is only an estimate and may not be enough for your particular situation. If you max out the loan, your monthly payments might not actually be manageable.
Buying a house that is more expensive than you can afford can lead to financial trouble if you have to stretch your monthly budget to make mortgage payments.
Homeownership comes with added expenses that can be difficult to manage on a monthly basis, such as home maintenance, repairs, insurance, property taxes, and homeowner’s association fees (if applicable). It is important to have a savings plan in place to cover these costs should they arise and know that you can afford any unforeseen costs.
If you’re planning to stretch your monthly budget to cover your mortgage, it might mean you can’t save up for an emergency or those house repairs. This will also eat up your cash flow for other financial goals.
Don’t get fixated on your maximum loan amount and start dreaming of a home that you can’t really afford. Focus on whether you can afford the monthly mortgage payment at the price point of the home you are interested in. For first-time homebuyers, being extra cautious might be a good idea, and buying a home below their maximum budget is often times a great idea.
The last thing you want to do is put your chances of mortgage approval at risk. Some of these mistakes can create massive headaches not only for you but for your mortgage broker. Before you apply for a loan, it is important to speak with a mortgage broker so that you can set yourself up for success. A broker will educate you on the process and what you should do from pre-approval to closing.
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