Buying a home for the first time is a big deal.
To help you get ahead, we’ve outlined some first-time homebuyer tips by calling out six of the biggest mistakes that you should avoid going into the purchase of your first home that could end up saving you a lot of time, money, and frustration.
Mistake #1: not getting pre-approved
Many first-time buyers make the mistake of thinking that they don’t need to get approved for a mortgage until they’ve found their dream home.
Unfortunately, that often ends up being too late.
These days, most sellers require that pre-approvals be submitted along with any offer, and, since your finances need to be vetted before the lender will agree to grant you a loan, this process can take days or even weeks.
Instead, we recommend applying for a pre-approval before you even start looking at a available properties.
Doing so will give you extra time to work on your finances, if needed, and will ensure that you’re ready to submit an offer ASAP once you’ve found your perfect match.
2. Borrowing the maximum amount
Once you have your pre-approval in hand, it’s time to decide how much you can afford to spend.
Many buyers mistakenly believe that the figure they’re given on their pre-approval letter should serve as their target sale price. However, make sure that this move won’t leave you feeling “house poor.”
Instead, it’s better to think of loan amounts as a range. You have the ability to borrow up to the amount on your pre-approval, but you don’t necessarily have to go that far.
The better move is to do some budgeting of your own.
First, look at your income and expenses to determine how much money you’d feel comfortable putting towards a mortgage payment each month. Then, using that number, play around with a mortgage calculator until you land on a price of how much house you can really afford.
3. Overestimating your abilities
Sometimes buyers are willing to take on any number of repairs and remodeling projects in exchange for for a low sale price.
Unfortunately, though, what ends up happening in many of these scenarios is that they end up finding that these properties were steals for a reason.
Often, the repairs require more time, money, and skills than the buyers can afford.
If you’re looking at fixer upper properties that require a lot of TLC — especially foreclosures, short sales, or auctions — you need to be honest with yourself about your abilities.
Do you have any previous remodeling experience? Can you afford to hire professional help? Are you prepared to cope with unforeseen problems and expenses?
Though some of these things may be hard to admit, doing so can end up saving you a lot of frustration in the long run.
4. Skipping the fine print
Yes, you should always read every contract you sign in full.
But, as anyone who’s ever sped through a “Terms & Conditions” agreement can tell you, that’s easier said than done.
While it might be tempting to simply skim your Agreement of Sale (and any addendums), resist the urge. This mistake could end up costing you.
Successful real estate transactions depend on each party fulfilling their respective contingencies by the deadlines specified in the agreement.
By signing, you’ve agreed to fulfill your end of the bargain. If you fail to meet those obligations, the seller may be entitled to take your deposit monies in reparations.
When you’re negotiating your offer, make sure you know exactly what you’re agreeing to before you sign on the dotted line.
5. Bypassing your inspections
Conventional wisdom states that skipping your inspections will put you in a better bargaining position. While this is true, the reality is inspections are for the buyer’s benefit.
They give you a realistic picture of what’s wrong with the property, so that you can either choose to buy it with eyes-wide-open and negotiate on repairs or walk away and find a more suitable option.
In contrast, when you choose to waive your inspections, you’ve agreed to take financial responsibility for any repairs that may come up, even if the problems pre-date your ownership of the property. Weigh your options carefully before deciding whether or not this risk is worth it to you. In some cases, just shortening your inspection contingency might be enough to make your offer more competitive.
6. Forgetting about closing costs
Budgeting to buy a home isn’t just about figuring out how you’ll swing a down payment and monthly mortgage amount.
There are also closing costs to consider.
Your closing costs will be paid at settlement. They will include any fees needed to facilitate the transaction such as deed-recording fees, title insurance, and appraisal costs.
The exact amount you’ll pay will depend on the specific services needed to close on your property. Realistically, however, you can expect to pay between 2%-5% of the home’s purchase price, and that needs to be factored into your overall cost of buying a place. We buy houses in Tampa.
While there’s no strict credit score minimum to get a mortgage and buy a home, there are guidelines most lenders follow. While your credit score is a major factor in buying a home, it’s not the only one. Lenders also consider your employment history, income, and current debts.
And, since credit scores fluctuate, following good credit practices can increase your score and help you get a mortgage or lower rate in the future.
Most first time home buyers are looking to understand how the credit process works. A good credit score can mean the difference between qualifying for a mortgage loan and having your application rejected.
It is important to understand what your credit score means, and how it is calculated. These factors directly influence your eligibility for a mortgage, in addition to your interest rate. Even if you qualify for a mortgage, a lower credit score means you’ll likely be stuck with a higher interest rate. And that high-interest rate will cost you more over the lifetime of the loan.
How does your credit score factor into buying a home?
To understand how your credit score factors into home buying, you first need to understand the credit score basics. You’ve probably heard the phrase “FICO score” in credit card commercials, but here’s what it really is. FICO (which stands for Fair Isaac Corporation) is one of the most common credit scores. It’s used by banks and other financial institutions to determine your creditworthiness.
So, what makes you worthy? The bank needs to believe you’ll pay back your mortgage loan, and that FICO score helps them decide whether or not you’re a risk.
For them, the higher the credit score, = the lower the risk, which means that you’ll enjoy lower interest rates. And, for those with lower credit scores, the opposite is true. Your credit score plays a huge role in determining whether a bank believes you a risk to pay back the mortgage loan or not. If you are deemed a lower risk (because you have a higher credit score), then you will have a lower interest rate and pay less for the loan. But if you have a lower credit score, the opposite will be true.
Factors that affect a Credit Report
FICO scores use several different factors from your credit report. This information comes from the three major credit bureaus (Equifax, Experian, and TransUnion), and it is used to assemble a score ranging from 300-850. Here are the factors that go into your credit score:
- New credit 10%
- Types of credit 10%
- Length of credit history 15%
- Amount owed (30%)
- Payment history (35%)
What credit score is needed to buy a house?
Your credit score plays a big role in your mortgage application, but it is important to remember that it isn’t the only factor. Financial institutions will also consider factors such as your employment history, your current debts, your income, the size of the loan you are asking for, and the total amount you are willing to offer in a down payment.
There are no hard lines when it comes to a minimum credit score. Instead of an exact answer on what is the right credit score to buy a house, most financial advisors use guidelines for home buyers. The guidelines help home buyers to determine if they are on the lower limits of an acceptable credit score or not. Here are a few credit score guidelines for the most common types of home loans:
When does your credit get checked in the home buying process?
When does your credit get checked in the home buying process? Well, once you send in your credit application to a lender, they are going to check your credit score. It is one of the first things they will do to determine whether you are eligible for a mortgage. If your credit score is too low for a particular lender, then they’ll use it to weed out your application before they go further and check things like your income and employment history.
Check your credit score for free by asking any of the three major credit bureaus (Experian, TransUnion, Equifax) for your credit report. Your credit report won’t just include your credit score — it will also include all of the factors that led to the final number. So you’ll be able to look and see if an account you forgot to pay, or a high credit utilization is dragging down your score. If your credit score isn’t as high as you’d like, don’t fret. You might not qualify for a mortgage right away, or you might not get the interest rate that you want right off the bat. But you can improve your credit score over time.
Types of home loans
Not all mortgages are made alike. There are several different types of home loans, and they have key differences. Here are the most common types of mortgages available on the market:
This is the most typical option — two-thirds of mortgages are conventional loans. Unlike FHA and VA loans, these loans aren’t backed by the government. Lenders will generally ask for a 20% down payment. If you can’t make that amount, you can pay as little as 5%. But going with a down payment under 20% means that you will have to pay for private mortgage insurance, which can be expensive. These loans typically have a 620 minimum credit score.
FHA loans are a are a valuable option for those with lower credit scores, as the minimum score for an FHA loan can be as low as 580. FHA loans also allow homebuyers to put down as little as 3.5%. Still, you’ll need to pay PMI if you decide to put down less than 20%, similar to a conventional loan.
VA loans are limited to veterans and current members of the US armed forces. They are especially attractive because home buyers seeking this type of loan can put as little as 0%. In addition, there is no PMI penalty for putting down less than 20%. VA loans are backed by the federal government, and lenders are not required to use a minimum credit score.
Is there a risk in having your credit checked multiple times during the application process?
When you apply for a mortgage, the credit check is listed on your credit report as an inquiry. That means that you are looking at taking on new debt. A credit inquiry will have a small negative impact on your overall score, but there isn’t much you can do about it.
You should also know that shopping around for a mortgage isn’t going to harm your score. If you have multiple credit checks from mortgage lenders within a 45-day period, it will be reported as a single inquiry. You can shop around by completing mortgage applications, getting a preapproval, or getting an official loan estimate.
Other types of credit applications can also have a negative impact on your credit score. Applications for credit cards, car loans, student loans, personal loans, and business loans can also result in an inquiry on your credit report that lowers your score. If you are considering shopping around for a mortgage, then you want to make sure that you avoid applying for a car loan, credit card, or another type of debt so that a new inquiry doesn’t push down your credit score.
The difference between a hard and a soft check
There is a difference between the types of inquiries that get listed on your credit report. Inquiries are separated into two categories: hard and soft.
Hard inquiries occur when a lender uses your credit report to make a decision on whether or not they will provide you with credit. Credit card applications, car loan applications, and mortgage applications are all forms of hard inquiries.
Soft inquiries occur when a credit card company checks your credit to pre approve you for a new credit card or when you check your own credit online. Soft inquiries aren’t listed on your credit report and they don’t impact your overall credit score.
How to improve your credit score
If your credit score isn’t where you want it to be, don’t get frustrated. You can improve your credit score over time. The first thing you should look at doing is lowering your credit card balances. Your card utilization rate plays a factor in your overall score. You’ll also want to make sure that you pay any unpaid debts as well as paying your bills on time. By paying off old accounts and keeping your new ones in good standing, your credit score will rise over time. You should also avoid taking out new lines of credit if you don’t have to. If you are making multiple applications for lines of credit, lenders will think that you are strapped for cash.
It will likely take months, at the earliest, to have a dramatic positive impact on your credit score. But following good credit practices, you can improve your score and put yourself in position to qualify for a mortgage or get a better rate.