1. Introduction:
The more exposure you have to buying real estate, the more informed you’ll be about the complications of this process. Whether you’re getting a small-sized home or a condo, the first home you buy will always be memorable. Although buying your first home is one of the most exhilarating experiences you can ever have, it can be very hectic and stressful. Having the right knowledge and information to navigate this process can make your home-buying experience much more rewarding.
2. 7 Mistakes To Avoid When Applying For A Loan For Your First Home:
Being too excited during the process, first-time homebuyers tend to make several mistakes that can certainly be avoided with the right guidance and information. If you want to skip the buyer’s remorse and not end up making an unwise investment, this is the right guide for you.
Let’s take a look at the top 7 mistakes first-time homebuyers make when applying for a loan, which are also avoidable:
a. Not comparing the rates:
One of the most overlooked steps in the homebuying process is to consider shopping around with multiple lenders while ignoring the fact that it can be very expensive. With offers from multiple vendors, you get to snag the most competitive loan terms and rates. Many first-time homebuyers don’t understand that the most minor difference in interest rate can help you save thousands of dollars over the loan term.
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Take your time and compare loan terms, lender fees, and rates:
Try to get rate quotes on the same day, after you’ve consulted 3-4 lenders, since rates tend to change almost daily. Don’t forget that for a seamless mortgage approval, lender responsiveness and customer service are both quite important.
b. Haven’t applied for a mortgage yet?
If you haven’t contacted a mortgage lender yet but you’re still tempted to start looking for a home, stop right there. Without a mortgage preapproval in such a tight market, sellers may not take your offer seriously. The main reason for this is that sellers believe that a potential buyer who is still unsure about acquiring financing may not be worth the risk.
| Pro tip:
Getting a preapproval means locking in your interest rate, which reduces the chances of rising rates when an offer is made. |
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Consult a lender before it’s too late:
The best thing to do before setting your heart on the house of your dreams is to acquire a fully underwritten approval. This won’t just show that you’re a serious buyer with the credit to get a loan, but will also keep you from looking at houses that you can’t afford.
c. Not taking your credit seriously:
Any mortgage lender will verify your credit report when you apply for mortgage preapproval, and when it’s time for closing, to ensure your financial profile hasn’t changed enough to impact your loan-paying ability. Many first-time homebuyers don’t know that their final loan approval can be jeopardized by new credit card accounts/loans on their credit reports.
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Pay your bills on time:
Experts suggest that you should avoid closing existing accounts, opening new credit cards, or making large purchases on existing card accounts during the preapproval-to-closing process. You should also pay your bills on time each month and pay down your existing balances to below 30 percent of your credit limit.
d. Not looking into government-insured loan programs:
If you don’t have stellar credit, you may not qualify for a conventional loan. Beginners can have trouble saving for a down payment on a house in the current market. In such cases, homebuyers think they have no financing options because they’ve overlooked USDA, VA, and FHA loans.
Let’s take a look at these three loan options:
| USDA (U.S. Department of Agriculture) Loans | VA (U.S. Department of Veterans Affairs) Loans | FHA (Federal Housing Administration) Loans |
| It is the best option for moderate- to low-income borrowers to buy houses in rural areas. | It is only an option for eligible veterans and active duty military service members and their spouses. | This loan allows for a score as low as 500 if you can put down 10 percent. |
| No down payment is required. | There may be a funding fee, but no down payment. | It requires a 3.5 percent down payment with a minimum credit score of 580. |
| To qualify, one must meet certain income limits and purchase a home in a USDA-eligible area. | Private lenders also offer VA loans with a cap on the lender fees. | One requirement is mandatory mortgage insurance that needs to be paid annually. |
e. Missing out on helping hands:
You probably don’t know that there are several first-time homebuyer programs offered at the local, state, and federal levels with discounts available for first-timers. Some programs provide down payment and closing cost assistance offered by each state’s housing finance authority.
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Check all websites:
Check out all housing authority websites, whether they’re federal, state, or local. Skipping this crucial step of looking for such programs could cost you more down payment and closing charges, as well as lead you to miss out on loans with favorable terms.
f. Not keeping a check on your savings:
Many first-timers forget to hold themself accountable for the savings they’re spending so recklessly. Spending most of your savings on closing costs and down payment is indeed one of the most common mistakes made by first-time homebuyers. Putting 20% or more down may mean not having to pay for PMI or private mortgage insurance when borrowing a conventional mortgage, but it’s certainly not worth risking living on the edge.
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It’s not just about the PMI:
Even after paying the closing costs, you should have around 3-6 months of living expenses instead of spending all your retirement or emergency savings just to avoid PMI, which can be removed on a conventional loan after achieving 80% equity in your home.
g. Buying more than your budget allows:
Just because you’ve found a house that seems like your ideal choice for a home doesn’t mean you should stretch your budget for it. These days, mortgage rates and home prices can be sky-high; hence, keeping a close look at your budget is key. You could risk losing the chance to fund your child’s education or save up for vacation if you’re house-poor.
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Think before you spend:
Just because you are eligible for a $400,000 loan doesn’t mean that you’ll be able to handle the monthly payments that follow. So when looking for a homebuyer loan, focus on the monthly payments that’ll come with it. Further, buying beyond your budget could put you at a much higher risk of foreclosure.
Conclusion:
Buying your first home is an exciting milestone that comes with several challenges. From choosing the right lenders to maintaining good credit habits, a lot goes into the process of applying for a home loan. But with the right mindset and careful planning, first-time homebuyers can avoid making costly mistakes.
Frequently Asked Questions
How long does the homebuying process take?
While it depends on market conditions, the process takes around 30-60 days.
What credit score is needed to buy a home?
Most lenders prefer a score of 620 or above.
What’s the difference between pre-qualification and pre-approval?
Pre-qualification is a rough estimate, whereas pre-approval includes the verification of financials.
Can I back out of a home purchase after signing a contract?
Yes, but if the contract doesn’t have contingencies, you’ll lose your earnest money.
Should I lock my interest rate?
Yes, because locking your rate can protect you from future increases in market rates.
