Dreaming about your first home? As any first time homebuyer will tell you, buying a home is an exciting and overwhelming experience. Before you start viewing listings, it pays to learn about your different home financing options. As a first-time home buyer, there’s a good chance that your first purchase won’t be your “forever” home, but instead a temporary starter home. Developing a short-term and long-term perspective on your home purchase can help prevent buyer’s remorse. Here are four common mistakes made by first-time home buyers—and four money management tips to avoid making these same errors.
Mistake #1: Overcommitting
Home loan lenders qualify potential homeowners based on their debt-to-income ratio. Lenders don’t take into account fixed expenses such as commuting costs, childcare, food or utilities. Consequently, many first-time buyers overcommit—borrowing the entire amount for which they are approved. Unfortunately, this can lead to serious payment shock down the road if there’s no flexibility built into the budget. Prior to meeting with a lender, determine how much you can comfortably afford to borrow and still meet your fixed income requirements, build your savings account, and adjust for future changes, like children.
Mistake #2: Failing to be prequalified
Once you run the numbers and determine your housing budget, visit your home loan lender and become prequalified. Even if you’re several months or a year away from purchasing a home, a prequalification meeting is essential to getting your financial affairs in order. You may also realize that an extra year of saving for a down payment or improving your credit score could significantly improve your loan terms. Then, when you find the perfect home, you’ll be in strong position to make your best offer.
Mistake #3: Not knowing your credit score
As a prospective homeowner, you likely realize that a 620 is the minimum credit score necessary to be qualified to purchase a home. However, thousands of dollars in potential savings stand between a 620 and a 720. Do you know your credit score? If you don’t, get a copy of your FICO score from each of the three major credit bureaus. A score between 680 and 720 will land you the best home financing options. Is your score lower than you’d like? Websites like bankrate.com offer free tips for improving your credit score.
Mistake #4: Not understanding home financing options
Thanks to the recent housing crisis, many first time homebuyers are opting for a conservative, 30-year fixed rate mortgage. However, if you plan to sell your home in the next five years, a 30-year fixed rate mortgage is actually a bad deal. You’ll be paying a premium for a product that you don’t need. A five-year adjustable rate mortgage may give you better terms now, while also making it easier to meet your other financial obligations. Understand the pros and cons for each home financing option rather than simply picking the most conservative option.