4 Big Money Mistakes of First-Time Homebuyers
Dreaming about your first home? Some first-time homebuyers can tell you, buying a home can be both an exciting and overwhelming experience. Before you start viewing listings and attending open houses, it helps to learn about your financing options.
There’s a chance that your first purchase may not be your “forever” home, but more likely a starter home. That’s why having a short-term and long-term financial perspective on your first home purchase may be a good idea (and may help prevent buyer’s remorse, too). Here are four common mistakes made by first-time homebuyers and some tips to help avoid these pitfalls.
Mistake #1: Over-Committing Your Spending Power
Mortgage lenders often qualify potential buyers for home loans based on their debt-to-income ratio. This ratio does not take into account any of your fixed expenses like utilities, insurance or taxes, says Forbes. Some first-time homebuyers over-commit their spending power by borrowing the entire amount of the loan for which they are approved, says U.S. News and World Report. Unfortunately, this may lead to little flexibility in your monthly budget for fixed expenses and also any unforeseen repairs or maintenance costs for your new home, says U.S. News and World Report.
Prior to meeting with a mortgage lender, you may want to determine how much you can comfortably afford to borrow and still meet your fixed expenses, build your savings accounts and adjust for potential changes, like a job change or children, says Forbes.
Mistake #2: Failing to Be Preapproved for a Loan
Once you run the numbers and determine your housing budget, talk to your mortgage lender about getting preapproved. Even if you’re several months or a year away from purchasing a home, a prequalification meeting can help get your financial affairs in order, says U.S News and World Report.
You may also realize that an extra year of saving for a down payment may improve your loan terms as well, says Forbes. Then, when you are ready to put an offer on your dream home, having a preapproval letter may put you in a stronger position against other bidders who did not get preapproved, says Trulia.
Mistake #3: Not Knowing Your Credit Score
A credit score can help mortgage lenders learn about your credit history and see what type of a borrower you might be, which may determine the amount of interest being charged for your loan. So, if you have a credit score which a lender deems as “reliable,” you may be approved for a lower interest rate on your loan, says U.S. News and World Report.
If you don’t know your credit score, you may want to consider getting a copy of your FICO score from each of the three major credit bureaus, says U.S. News and World Report. Don’t forget, you can receive a free copy of your credit report at AnnualCreditReport.com once every 12 months.
Trulia also suggests checking your credit score at least three months before house hunting. Should you find any errors in your reports, this will give you enough time to correct them.
Mistake #4: Not Understanding Your Financing Options
Make sure to understand the pros and cons for each home financing option, whether it is a 30-year fixed rate mortgage, a 15-year fixed rate mortgage or a five-year adjustable rate mortgage, says USA Today. Your situation and how long you plan to stay in your new home may help you determine which financing option is right for you, says Forbes.
With enough time and preparation, you may be able to avoid these common pitfalls of first-time homebuyers and, hopefully, find the house of your dreams.
Originally published July 9, 2012.