Four First-Time Homebuyer Mistakes to Avoid

November 6, 2015
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Image courtesy of stockimages at FreeDigitalPhotos.net.

Image courtesy of stockimages at FreeDigitalPhotos.net.

Many first-time homebuyers are so excited about the decision to buy a new home, they forego critical steps that can prove financially and emotionally disastrous in the long-run.

Here are four mistakes to avoid when buying your first home.

1. Ignoring the importance of your credit score.  First-time home buyers are often naïve about how costly a low credit score can be.  Mortgage lending amounts are calculated based on interest rates and terms based on credit scores.  A low credit score means the lender must incur greater risk as there is a greater chance you may be negligent with your payments vs. a person who has a long history of paying all bills on time and has relatively little debt.  Lenders charge higher interest rates to buyers with low credit scores, so get your credit back on track before buying a home, unless you are comfortable incurring higher interest rates.

2. Foregoing a pre-approval letter.  Competition is still fierce in popular neighborhoods, so it’s important to meet with a lender before you actually start house-hunting.  The mortgage lender will be able to pre-approve a mortgage amount based on various criteria and help you determine if you should save for a larger down-payment, and if not, which mortgage product is ideal for you.  Having a pre-approval letter will go a long way when you actually make an offer as sellers are more likely to accept offers accompanied by a rock-solid pre-approval letter.

3. Borrowing the maximum amount.  Often times, first-time home purchasers are overly optimistic about their ability to afford their new home and unrealistic about future expenses.  During the loan qualification process, lenders consider credit score, debt-to-income ratio and total income in order to ascertain the total amount that they will lend.  Lenders don’t consider whether or not you want to have children; travel the world or establish a college savings fund for your current or future children, and your other plans.

Experts recommend creating a budget delineating all actual and potential expenses, such as allocating $200-$400 per month to take that dream trip to Europe in a few years or to save for your children’s college tuition.  It’s also important to have a little wiggle room in your monthly budget for unanticipated expenses, such as a broken furnace, and to be able to increase your savings safety net in the event of job loss.  This will enable you to determine a target monthly mortgage, taxes and interest payment—also consider potential HOA fees, so that you avoid borrowing what the lender assumes you can afford, but in all actuality, you cannot.

4. Selecting the wrong mortgage type.  First-time home buyers are often unaware of five low and low-down payment options for which they may qualify.  For example, the VA guarantees purchase mortgages without a down payment or mortgage insurance for qualified veterans.  Researching these mortgage types and discussing them with an experienced mortgage lender will ensure you don’t miss an opportunity to save a ton of money.

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