11 Mistakes First-Time Homebuyers Should Avoid

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11 Mistakes First-Time Homebuyers Should Avoid

Buying your first home can be an exciting and nerve-wracking experience. You not only have to find the right place, but you also have to find the right mortgage. With low inventory in many local markets and rising home prices nationwide, finding an affordable home can be a challenge.

You might feel pressure to find a home right away, but before you visit houses and start making offers, your financing needs to be in order. That involves making sure your credit history and credit score, debt-to-income ratio,and overall financial picture will convince a lender that you’re creditworthy enough to borrow money.

Many first-time buyers tend to make a number of missteps in the mortgage and home-buying processes. Here are some of the most common mistakes to avoid.

Key Takeaways

  • Obvious credit issues—a history of late payments, debt collection actions, or significant debt—could mean less-than-ideal interest rates and terms, or even an outright denial.
  • Boost your score by paying bills on time, making more than the minimum monthly payments on debts,and not maxing out your available credit.
  • Sellers are more likely to consider offers from buyers who have a pre-approval letter from a lender.
  • Apply for a mortgage with a few lenders to get a better sense of what you can afford and clearer comparison of loan products, interest rates, closing costs, and lender fees.

1. Not Keeping Tabs on Your Credit

No one likes surprises, especially before buying a house. If you or your spouse have obvious credit issues—such as a history of late payments, debt collection actions, or significant debt—mortgage lenders might offer you less-than-ideal interest rates and terms(or deny your application outright) (or deny your application outright).Either situation can be frustrating and can push back your ideal timeline.

To tackle potential problems in advance, check your credit report for free each year at annualcreditreport.com from each of the three credit reporting agencies: Transunion, Equifax, and Experian. Look for errorsand dispute any mistakes in writing with the reporting agency and creditor, including supporting documentation to help make your case. For additional proactive help, consider utilizing one of the best credit monitoring services.

There is no simple method to delete negative entries that are current yet correct, such late payments or past-due bills. They will, regrettably, remain on your credit record for seven to ten years. However, you may improve your score by paying your bills on time, paying off your debts more than the minimum amount due each month, and refraining from using all of your available credit. Be patient above everything else. A poor credit score may be raised after at least a year.

Make sure you can obtain your credit score for free through your bank, credit union, or credit card company. You can have problems being accepted for a conventional mortgage if your score is lower than 620. To utilize the program’s maximum financing (3.5% down payment), you’ll need a minimum credit score of 580 to be eligible for an FHA loan. A 10% down payment is necessary if your credit score is between 500 and 579.

2. Searching for Homes Before Getting Pre-Approved

There is no time to waste when you locate the ideal home. There will be fierce rivalry and several offers in many hot markets. Buyers without a pre-approval letter from a lender are unlikely to get their bids accepted by sellers. According to your credit history and score, income and job history, financial assets, and other important variables, a pre-approval letter from a lender demonstrates to a seller that the lender has done its due investigation to guarantee you have the ability and willingness to pay your debts.

Without a pre-approval letter, sellers in a competitive market won’t take you seriously, and you might miss out on a house you truly want. The loan amount you are eligible for, your interest rate, the loan program, and your anticipated down payment amount are all included in this paper. In rare circumstances, lenders can require you to submit evidence of finances for a down payment (particularly for more expensive properties or in highly competitive markets). Usually within 90 days, the pre-approval letter typically contains an expiry date.

3. Not Shopping Around for a Mortgage

When homebuyers don’t shop around for a mortgage, they might be leaving a lot of money on the table. Applying for a mortgage with a few different lenders helps you determine your affordability and enables you to compare loan terms, interest rates, closing expenses, and lender fees on an equal footing. More importantly, looking for a mortgage gives you more negotiating power with lenders so you can secure the finest terms.

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Pay attention to fees and closing charges when you compare lenders since they might mount up at the closing table. On paper, some of the price variations may not seem to be significant, but over the course of your loan, they might result in substantial cost savings. Remember that certain lenders may provide you with discount “points,” a means to reduce your interest rate in advance. Your closing fees go increase as a result. As a way to make up the gap, other lenders that advertise low or no closing fees sometimes offer higher interest rates. According to a 2021 poll by ClosingCorp, a provider of real estate closing cost statistics, homebuyers in the United States spend, on average, $6,837 on closing expenses.

Ask a mortgage broker to compare rates on your behalf in addition to checking with your present financial institution (either a bank or credit union). Mortgage brokers serve as a matchmaker between you and lenders in their network; they are not lenders. By contrasting different lenders with goods that suit your requirements, they may help you save time and money. It’s also worthwhile investigating some direct lenders to see what they have to offer, whether online or in person. A mortgage calculator may be a useful tool for planning some of the expenses.

You may compare rates and closing expenses side by side by applying for a mortgage with various lenders. You’ll get loan estimates this way. Additionally, if you browse for rates for the most part within a 30-day period, the several credit checks lenders do will only count as one hard inquiry and are less likely to affect your credit score. There is no ideal number of lenders to compare, but having three to five loan estimates in your possession can provide you a solid foundation.

4. Buying a More Expensive House Than You Can Afford

If a lender says you may borrow up to $300,000, it does not always imply you should. Your monthly payments may not truly be affordable if you borrow to the maximum amount. Most potential homeowners can often afford a loan amount that is 2 to 2.5 times their gross yearly income.

To put it another way, if your annual income is $75,000, you could be able to purchase a house that costs between $150,000 and $187,500. You may use the mortgage calculator on Investopedia to estimate your monthly payments, which is a better indicator of your ability to purchase a property in a certain price range.

If you have to stretch your monthly budget to cover your mortgage payments after purchasing a home that is more costly than you can properly afford, you might find yourself in difficulty. In other words, you can end yourself regretting your purchase and feeling “home poor.”

Remember that owning a property has other costs in addition to the mortgage payments each month. You must set aside money for foreseeable maintenance costs, repairs, insurance, real estate taxes, homeowner’s association dues (if applicable), and other expenditures that tenants are not responsible for.

Stretching your monthly budget to meet your mortgage may prevent you from saving money for an emergency or those necessary home repairs. It will also take away from your available cash for other financial objectives.

Focus instead on whether you can afford the monthly mortgage payment at that price point rather than the maximum loan amount for which you are authorized. First-time homebuyers may wish to exercise additional caution and purchase a property that is within their maximum price range.

5. Not Hiring a Real Estate Agent

It takes a lot of time and effort to look for a property on your own. A knowledgeable real estate agent may assist you in reducing your options and identifying problems (both with the physical property and in the negotiation process with sellers).Lawyers won’t assist you in your search for a house, but they may assist you with the drafting of an offer, negotiating the terms of the purchase agreement, and acting as a closing agent. Real estate attorneys are required in certain jurisdictions to manage the transaction.

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Additionally, a seller’s agent could offer to represent you if you attend showings without your own real estate agent. This may be risky since the agent’s priority is to get the seller’s best and highest bid, not your interests. You’ll be able to make better decisions if you have a personal agent whose objectives are more in line with your own.

The expense of hiring an agent won’t come out of your wallet, which is the best part. In most cases, the buyer does not pay the buying agent’s commission. Typically, the commission is divided with the buyer’s agency by the seller and the seller’s agent.

6. Opening (or Closing) Lines of Credit

Even after receiving a mortgage pre-approval, you may still get a negative response. Mortgage lenders do a credit check on you during pre-approval and once more just before closing before giving you the go-ahead. Maintain the status quo with your money and credit in the meantime. That entails refraining from establishing new credit lines or terminating current ones. This might result in a decline in credit score and an increase in debt-to-income ratio, two factors that are often used by lenders to withhold final approval.

Wait to open new credit lines until after your house purchase is finalized (like a car loan or a new credit card).In addition, canceling an account eliminates that credit history from your report even if paying off a credit card or loan before closing on a property is fantastic. One of the most important components used by credit reporting agencies to calculate your credit score is the length of credit.

Keep the account active and open instead, but wait to use it until after shutting.

For prolonged inactivity, certain credit card providers may shut your account, which might also be bad for your credit. Maintain account activity by making minor monthly purchases that you quickly and fully remit.

7. Making Big Purchases on Credit

Running up existing accounts may lower your score just as acquiring or cancelling lines of credit does. Keep your money and credit in good standing until you close on your house, once again. Use cash instead, or even better, wait until after closing to purchase any new furnishings or a television.

You should also obtain a feel of how your budget will manage the expenditures associated with becoming a new homeowner. Before adding additional monthly payments for large goods to the mix, you may want to wait a few months.

8. Moving Around Money

Making large deposits or withdrawals from your bank accounts or other assets is another mortgage underwriting no-no. Lenders may assume that you received a loan if they see abrupt movements in or out of unaccounted funds, which would have an effect on your debt-to-income ratio.

Transparent deposits, such a bonus from your company or a tax return, don’t worry lenders. However, a lender will want documentation to confirm that the deposit isn’t really a covert loan if a friend sends you money or you get company revenue in your personal account. If the deposit is from something you sold, be prepared for a lender to request a bill of sale, a voided check, or a pay stub.

A gift from a friend or family may be used to your down payment. Many loan products, nevertheless, need a gift letter and supporting paperwork to source the deposit and confirm that the donor isn’t counting on you to repay the money.

9. Changing Jobs

While moving professions may be good for your career, it might make getting a mortgage more difficult. Lenders want to be sure that you have a steady source of income and work and the financial means to pay back your mortgage. Any changes in your employment or income after receiving pre-approval for a mortgage might be a red flag and cause a delay in closing.

You often need to provide documentation of two years of continuous job and income in order to get permission. When you switch jobs, this uninterrupted history of earnings and employment is disturbed, especially if you choose a lower-paying position.

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Lenders also require proof that you’ve been earning that income for two years in a row if you transition to a position that pays commissions equal to 25% or more of your salary. Lenders advise putting off employment changes until after your loan closes whenever it is feasible. Inform your lender as soon as possible if that is not possible.

10. Skipping the Home Inspection

Waiving a house inspection may be an expensive error unless you have a lot of money to spend on home improvements and are ready to face the chance of having to pay for unanticipated repairs. The purpose of a house inspection is to uncover significant problems with a property and to safeguard the buyer.

If you don’t have an inspection, you won’t be able to take legal action if a serious problem, such broken pipes or water damage, emerges after the closing of a house. As a result, you could be responsible for paying for all of the necessary repairs. When you submit an offer to purchase a house, you may add a home inspection contingency that allows you to back out of the agreement without incurring any fees if a significant problem is found and the seller refuses to remedy it before closing.

You may withdraw your offer and often get a full refund of your earnest money payment if that contingency is present. The buyer often pays the home inspector up ahead with the non-refundable home inspection charge. Depending on the location and size of the property, it normally varies from $300 to $500. When compared to the possible expenditures of having to replace a furnace, water heater, roof, or other expensive items—which may pile to thousands of dollars—it is a little price to pay.

If your lender wants it, you should think about getting extra inspections, such as a sewer scope, mold or radon examination, or a pest inspection. These and other examinations may assist in safeguarding your safety and investment.

11. Not Comparing the Loan Estimate to the Closing Disclosure

The closing disclosure must be given to you by your lender three working days before the closing. This paper includes a detailed breakdown of all closing expenses, including down payment, closing fees, loan conditions, and other crucial information. To be sure you aren’t being charged additional costs (sometimes known as garbage fees) by your lender or other parties involved in the transaction, carefully check this five-page document to the first loan estimate you got.

Ask your lender why some costs increased higher than anticipated. In order to avoid paperwork problems on the closing day, be sure that fundamental information, such as your name and other identifying facts, are included accurately. Inform your lender right away if you discover any mistakes or suspicious or illogical additional costs so that they may be resolved. Your closure may need to be postponed in specific circumstances so that the documentation can be updated, rectified, and any problems can be fixed.

The Bottom Line

Avoid unintentionally jeopardizing your mortgage and your property acquisition. Even while some of these errors appear benign, they may really hinder your closure and cause a ton of problems.

Talk to your lender about what you should do from pre-approval to closing to ensure a smooth process. And try to keep all of your documents—bank statements, W-2s, deposit records, tax returns, pay stubs, and so on—organized and updated so you can provide documentation if your lender requests it.

When it comes time to buy your first home, being well-read and educated about the lending and real estate process can help you avoid some of these mistakes,not to mention saving money along the way. Further ensure that the transaction goes smoothly by having trained, experienced professionals by your side to guide you. This can alleviate some of the stress and complexity along the way.

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