Blog by Laura Minor from Sprintfunding (https://sprintfunding.com)
Entering the world of home buying can be an exciting yet daunting experience, especially when navigating the complexities of the real estate market.
Mistake 5: Being careless with credit
When you’re looking to get preapproved for a mortgage, the lender will take a look at your credit report to ensure everything’s in order. They’ll check it again right before closing to confirm that nothing significant has changed with your finances.
For first-time homebuyers, it’s crucial to understand that any new debts or credit card accounts popping up on your credit report could throw a wrench in the works for your closing and final loan approval.
Unfortunately, many first-time buyers find out about this the hard way.
What to Do
– Pay your bills on time: Late payments can lower your credit score and lead to higher interest rates. Create a budget and payment schedule to stay consistent with your bill payments.
– Avoid taking on new debt: Before buying a home, keep your credit usage low. Avoid making major purchases or taking out new loans that could increase your debt-to-income ratio, potentially raising interest rates or hurting your loan eligibility.
– Dispute any inaccuracies: If you find errors on your credit report, reach out to the respective credit bureau promptly to dispute the information.
Mistake 6: Overlooking FHA, VA and USDA loans
If you’re buying a home for the first time, you might find it tough to scrape together enough cash, especially with home prices going up.
And if your savings for a down payment are on the low side, or if your credit score isn’t exactly top-notch, getting approved for a regular loan can be tricky.
You might think you’re out of options and consider putting off looking for a home because of this.
What to Do
– Consider checking out one of the three loan options supported by the government. These include FHA loansfrom the Federal Housing Administration, VA loans from the U.S. Department of Veterans Affairs, and USDA loans from the U.S. Department of Agriculture.
Here’s a quick rundown of what each one offers:
FHA loans are insured by the Federal Housing Administration, allowing lenders to offer lower down payment options, as low as 3.5%.
To qualify for an FHA loan, you must have:
– A credit score of at least 580
– A debt-to-income ratio (DTI) below 43%
– Purchase a home that meets FHA appraisal standards
VA loans, backed by the Department of Veterans Affairs, are available to eligible veterans and surviving spouses.
VA loans have several benefits:
– No down payment required
– No private mortgage insurance (PMI) needed
– Competitive interest rates
To qualify for a VA loan, you must have proof of military service and meet specific service duration requirements, as well as typical lending criteria such as income and credit score.
USDA loans, supported by the U.S. Department of Agriculture, are designed to assist buyers in purchasing property in rural or suburban areas.
These loans have various advantages:
– No down payment necessary
– Low-interest rates
– A variety of eligible properties, including single-family homes, new construction, and modular homes
To qualify, you need to have a household income below the area’s median, and the property must meet USDA’s eligibility requirements.
Loan Type
Benefits
Requirements
FHA
Low down payment options
Credit score, DTI, property standards
VA
No down payment, no PMI
Military service, income, credit score
USDA
No down payment, low-interest rates
Income limits, property location
Mistake 7: Moving too fast
The biggest mistake people make is not planning ahead enough for their purchase.
Buying a home isn’t always straightforward, especially when you dive into the details of getting a mortgage.
When you rush, you might end up not having enough saved for a down payment and closing costs. Trying to speed through to the closing might also mean missing the chance to fix issues on your credit report that could help you get a better deal on your loan.
What to Do
– Resist the impulse to jump on a deal without thoroughly exploring the market. This includes understanding the neighborhood, local amenities, and average home prices.
To do this, start your search early and create a list of priorities, such as:
– Proximity to work or school
– Safety and crime rates
– Public transportation and commute times
– Availability of shops, restaurants, and entertainment
– Plan your finances. Be realistic about what you can afford, and don’t stretch yourself too thin. An easy way to get a grip on your budget is to follow the 28/36 Rule.
This guideline suggests:
– Spending no more than 28% of your gross monthly income on housing expenses (mortgage, insurance, and taxes)
– Total monthly debt payments (including housing) should not exceed 36% of gross monthly income.
– Avoid rushing through the inspection process. A thorough home inspection can uncover hidden issues and save you from costly repairs down the line. Take the time to understand the report, ask questions, and even get a second opinion if necessary.
Mistake 8: Buying more house than you can afford
If you’re buying a home for the first time, it’s really easy to get swept away by places that might push your budget too far. Stretching your finances too thin isn’t wise, especially with home prices on the rise. It’s crucial to keep a tight grip on your budget.
Going for a house that’s more than you can afford can lead to trouble, like the risk of losing your home if money gets tight. It also means you’ll have less wiggle room in your monthly budget for other expenses. Being “house poor” means you might have to give up on other things that matter to you, like saving for retirement, your child’s college fund, or even a dream vacation.
What to Do
– Don’t stretch your budget too thin. When you’re searching for a house, it’s easy to get caught up in the excitement and overlook your budget.
Falling in love with a larger, more expensive property you can’t comfortably afford can lead to potential financial stress down the road. Instead, focus on finding a house within your affordability range to maintain a comfortable lifestyle.
– Stick to the 28/36 rule. This rule states that your monthly mortgage payment should not exceed 28% of your gross monthly income, and your total monthly debt (mortgage, credit cards, student loans, etc.) shouldn’t exceed 36% of your gross income. Adhering to this rule can help you maintain a healthy financial situation.
– Consider unforeseen expenses. Your financial responsibilities do not end with your mortgage payment. Make sure to factor in property taxes, insurance, utilities, maintenance, and potential emergencies. By addressing these costs within your budget, you’ll have a clearer idea of the true costs you’ll be responsible for when purchasing a house.
– Get pre-approved and know your limit. Before beginning your house hunt, get pre-approved for a mortgage loan. This process entails a comprehensive evaluation of your credit and financial information, which allows a lender to determine your loan eligibility.
With a pre-approval letter in hand, you’ll know your spending limit, be taken more seriously by sellers, and avoid the disappointment of finding and falling in love with a house beyond your means.
Mistake 9: Draining your savings
When buying a home, avoid draining your savings, as it can lead to financial instability. You should strike a balance between the initial costs and maintaining a financial cushion for emergencies.
What to Do
– Assess your financial situation: Before making any home purchase, have a clear understanding of your current financial standing. Calculate the total amount of savings, investments, and emergency funds you have. This will help you gauge how much you can afford without draining your savings.
– Consider various expenses: Apart from the down payment, there are various other expenses you will need to cover when buying a home.
These may include:
1. Closing costs
2. Home inspection fees
3. Moving expenses
4. Immediate repairs and renovations
5. Property taxes and insurance premiums
– By keeping these costs in mind, you can avoid depleting your savings during the home buying process.
– Set a comfortable down payment: While it might be tempting to make a larger down payment to lower your monthly mortgage payments, doing so could deplete your savings. Aim for a down payment that is both comfortable for you and in line with your broader financial goals.
– Avoid overspending: It’s easy to fall in love with a house that is beyond your budget. However, stretching too far financially can lead to unintended consequences, such as having to cut back on other important expenses or not having enough funds for emergencies. Keep your budget in mind and stay within a price range that won’t strain your finances.
– Have a contingency fund: Emergencies can happen anytime, and it is essential to be prepared. Allocate a portion of your savings as a contingency fund, so you can cover unexpected expenses without jeopardizing your new home purchase or your financial well-being.
By taking these precautions, you can prevent draining your savings and ensure a more secure financial future while enjoying your new home.
Mistake 10: Assuming you need a 20 percent down payment
While it’s true that a larger down payment can help you secure better mortgage terms, it’s important to remember that there are other options available.
In recent years, mortgage lenders have become more flexible in offering loans with lower down payment requirements. Programs like FHA loans and VA loans often have down payment requirements of less than 5 percent.
Additionally, some credit unions and local banks provide first-time homebuyer programs with reduced down payment requirements.
What to Do
1. Speak with multiple lenders – Each lender has different loan programs and eligibility requirements. Do your due diligence by checking with various lenders to find the best-fit program for your situation.
2. Check for first-time homebuyer programs – Your state or local government may offer assistance programs with lower down payment requirements. Example: Customer Assistance Programs (CAP) provide grants.
3. Consider saving an emergency fund – Before purchasing a home, it’s important to have an emergency fund in place to cover unexpected expenses. This will help you avoid becoming house poor and ensure you’re financially prepared to be a homeowner.
Remember, you don’t have to wait until you have a 20 percent down payment saved up to buy a home. By exploring alternative options and programs, you can make informed decisions on the best financial path toward homeownership.
