1. First time homebuyers don’t clean up their credit before applying for a loan
Unless a first time homebuyer has the ability to pay for the home they’re looking at in cash, they’re going to have to take out a home loan. Getting approved for a loan, how much you can take out on the loan, the interest rate, and monthly payment on the loan are highly contingent on the borrower’s credit score number.
With future plans of house hunting, whether it’s six months, a year, or even two years away, the best financial move first time homebuyers can make to ensure their credit is clear of any discrepancies. Paying down outstanding debts and balances on accounts while also making sure to meet at least the minimum payments on time on all monthly bills is crucial. The higher the credit score, the lower your monthly payments.
2. They don’t take the time to get preapproved before house hunting
It’s easy for first time homebuyers to assume what they can afford and to just start looking without taking the steps through the lender first, but it’s not the smart move. Most real estate agents won’t show potential homes without a pre-qualification letter in hand. And some won’t do anything without the pre-approval.
While basically the same thing, there are differences between getting pre-qualified and pre-approved which is why the latter is taken more seriously.
- Pre-qualification: This is an unofficial process that is usually free and not always reliable. It’s a quick way to estimate a ballpark figure on what a lender will be willing to give based on the information the borrower tells them. Some real estate agents consider this enough to start the process. But because it’s not based on credit and financial checks, it’s not official.
- Preapproval: Borrowers are given a pre-approval letter from a lender after the bank is able to verify all of the credit and financial information. It will reveal how much the bank will be willing to lend as well giving agents and sellers confidence in moving forward. Pre-approval terms are usually good for a specified period of time, anywhere from 30 to 90 days. After that time frame expires, the process has to be repeated with a new letter issued.
3. They take on more than they can handle financially
Many first-time homebuyers make the mistake of assuming that just because they can afford the house, that means that they can afford to live there. That’s not always the case. There are many extra costs associated with homeownership that often get overlooked by someone who is new to the game.
Homeowner’s insurance, property taxes that increase over time, heat and electricity for a giant house…Make sure to factor in any and all variables to your new home budget. You might just find that it comes at a price that you can’t afford to pay.
4. They get into a fixer upper they don’t have time or money to fix
Fixer-uppers can often seem like great savings. Home renovation shows can do that to anyone. The problem is, though, that most people don’t have a production company budget and a huge crew behind them working around the clock to get the jobs done. Without money and time, fixer-uppers stay fixer-uppers. Not only can the novelty wear off fast, but what seemed like huge savings quickly starts to look like a giant money pit.
Be realistic and think long-term. In the end, you might just end up happier in the smaller home that was move-in ready than the giant, outdated Victorian house with the electric issues and the leaky roof, and the windows that don’t open.
5. They prioritize the home over the neighborhood
When people start looking for that dream home in their dream neighborhood, many realize just how far outside their budgets dream homes can be, especially in big cities and affluent suburbs. It’s tempting to continue to look for that same dream home, just in a neighborhood that might not be as good.
The problem is, homes in the less-affluent neighborhoods don’t sell as well, especially in the current market, and many people find themselves trapped. The smarter move is to buy a home inside your price range in a decent-to-good neighborhood. It might not be your dream home just yet, but the potential to sell for a profit in a few years is much greater, which will help you on your way to landing that dream home you want in the good neighborhood.
6. First time homebuyers put all their eggs in the online basket
The internet has become an invaluable tool for first time homebuyers. Searching through homes, researching neighborhoods, getting your credit score, and finding out what lenders are prepared to give has never been so easy. However, it’s still not as good as getting a reputable team of professionals who can physically meet with or at least speak with you in your corner.
Get a great real estate agent, a good loan officer that you trust, and possibly even a lawyer if necessary. Drive around town with your real estate agent and look at neighborhoods in person. Meet with your loan officer to get the facts.
7. They wrack up debt before getting the mortgage
Debt-to-income ratio is a huge deciding factor on credit scores and it’s one of the first things that lenders look at when putting your mortgage together. Lenders want to know how much debt borrowers have already accumulated against their income. The more debt the borrower has, the less of a loan they will be able to get.
Many people start off their adult lives with a significant chunk of student debt. Paying that down as much as possible or off completely will help significantly improve your debt-to-income ratio. Also, consider buying used cars in order to avoid taking out a car loan until after you have your mortgage.
8. They spend all their money on the down payment
Putting down a 20 percent down payment on a home is often mandatory these days unless you’re interested in paying mortgage insurance. Many people save and scrape every last dollar they can get together for years in order to meet that 20 percent down payment figure and then as soon as they reach it, they go through the home buying process. Many people empty out their savings in order to meet the down payment, leaving themselves with nothing left over.
Don’t paint yourself into a corner where you’re forced to live paycheck to paycheck, up against the very edge of your budget. Either allow some extra time to keep building savings that will give you somewhat of a cushion, or put down a slightly lesser down payment on the home and opt for the mortgage insurance. Never leave yourself without a little something for a rainy day, no matter how much you love a house.
9. They skip the home inspection
Skipping the home inspection might seem like a quick and easy way to save money for some people. The novelty and excitement of a new home make some people feel like there’s nothing that would possibly change their minds about wanting to buy it. That is until you’re moved in and realize that there are major and very costly maintenance issues such as mold, termites, a leaking roof, electrical issues, or foundation problems. All of these things could have been discovered with a simple home inspection. They run an average of $400 – $500 in most cases and are worth every penny in the long run. If you need to skimp on the home inspection in order to afford the house, you shouldn’t be buying just yet anyway.
10. First time homebuyers make another big purchase before closing
Buying a home for the first time is an exciting thing for anyone. Often, many people sign the papers and instantly begin planning how they’re going to furnish and decorate their homes. But planning is as far as it should go until everything is completely finalized.
However, many people don’t realize that lenders look at all financial information again before closing occurs to make sure that nothing has changed. And that debt-to-income ratio that they used to create your mortgage in the first place is one of the first things they’re going back to check. So, hold off on any plans to buy a new car to park in that new driveway or furniture to fill the house.
