Even though the Internet is full of helpful advice on blogs such as this, there are still homebuyers bypassing important considerations when purchasing a house. This is especially true for first-time homebuyers and it isn't because the homebuying process is difficult. Rather, too many homebuyers get caught up in the emotion of purchasing their first homes that they often overlook key factors in the process.
Purchasing a home doesn't have to be a challenge. If you are in the market for your first home, take a deep breath, do your homework and remember to include the following items.
Following up on this series, here are four additional mistakes first-time homebuyers tend to make:
"Select a mortgage that works with your lifestyle."
Familiarizing yourself with the various mortgage types
There are many options available, and which one works for you is entirely dependent on your situation. Are you planning to live in the home for many years, or do you think you will spend just a few years there and then move on? These are questions you need to ask yourself when choosing a mortgage.
If you are only going to be in a home for a short amount of time, then an adjustable-rate mortgage option might be your best bet because it may allow you take advantage of lower rates right away. On the other hand, if you are confident that you will be in your home for an extended period of time, then a fixed-rate mortgage option may be best for you. Your monthly rate will stay the same throughout the duration of the loan, making it easy for you to budget expenses and stay on track with your future payments.
There are many other program options to consider as well. An FHA loan, a VA loan and a Jumbo loan are a handful of options available if you're not obtaining a conventional home loan. If you served in the military, then you may be able to purchase with no down payment with a VA loan. Veteran Home loans generally have lower monthly mortgage payments, as private mortgage insurance is not required. Similarly, FHA loans are backed by the Federal Housing Administration, which offer less restrictive approval criteria, including as little as 3.5 percent down payment. With a Jumbo loan, loan amounts range from $ 417,001 up to $5,000,000 (depending on the state the property is located, credit profile and program chosen).
What is important is that you assess your situation and share this information with your lender.
Taking into consideration the importance of your credit score
Your credit score is an important factor but not the only thing that lenders will evaluate when considering you for a loan. Remember, a lender doesn't know you, and they will need a basis for which program or interest rate you might be eligible for. This is where your credit score comes into play.
Credit scores range from 300 to 850, with 781 – 850 being considered "excellent" credit, "good" being 661 – 780, "fair" 601 – 660 and "poor" 501 – 600. According to Credit.com, having an idea of where you stand is important as it puts your credit profile in perspective. If you have a lower score then it is likely that your options will be limited.
If you know you are going to be looking for a home soon, then you should inquire about your credit score and obtain a copy of your credit report. This is not only to get a sense of where you stand, but also to make sure that there are no errors on your credit report. According to U.S. News and World Report, errors can happen on credit reports, and by disputing them you can help boost your credit score.
Knowing where you stand will help you be better prepared to discuss the home loan process with a lender.
In addition to knowing your credit score, it is important to make sure your debt-to-income ratio is where it should be for qualifying purposes. Lenders look at these numbers to see if you are in a position to repay your loan.
According to the Consumer Financial Protection Bureau, you can find your debt-to-income ratio by adding your total monthly debt payments and divide them by your gross monthly income. The higher this ratio, the more difficult it will be for you to qualify for a loan.
Typically, a 43 percent debt-to-income ratio is considered the highest that a borrower can have. Nevertheless, there are many lenders who will work with you if your ratio is higher.
Not getting prequalified
By being prequalified, you are putting yourself in a great position to move forward with the process. Additionally, you don't have to be starting the house-hunting process to get prequalified. It is never too early to get prequalified.
"It's never too early to get prequalified."
For many first-time homebuyers, it will take some time to save enough cash and build good credit scores before making an offer on a home. By getting the prequalification out of the way early on, you have time to make changes or dispute errors on your credit report if necessary. If you are thinking about purchasing a home, set up a buyer consultation meeting with your lender so you can begin the prequalification process and put details in place for the best approach moving forward.
When purchasing a home, especially for the first time, make sure you consult your lender to work out all the details. Don't hesitate or try to go through the process on your own. Seek financial assistance, shop around for a home that fits your lifestyle and have the confidence to move forward with the home purchase process.