Purchasing one’s first home is no small task that requires thoughtful planning and financial discipline leading up to the actual purchase. For first time homebuyers having never gone through the home buying process, it is understandably easy to make a mistake that could prove costly down the road for a family. In this article we talk about three common mistakes made by first time homebuyers when buying a home.
Underestimating the importance of a high credit score
Mortgage Lenders look at a variety of factors when evaluating an applicant for a home loan. A borrowers credit score is high on the list of several criteria that a lender will evaluate when reviewing a loan application. First time homebuyers should not underestimate the importance of building strong credit and a high FICO score leading up to their first home purchase.
All mortgage lending is done with a tier of interest rates and terms based on consumer credit scores. A credit score of 740 or above will earn the best interest rates and can potentially save thousands of dollars in interest over the long term.
A score of 680 to 740 can get good mortgage rates, while a FICO score of 620 is normally the lowest score to qualify for most Conventional loans. FHA loans allow credit scores even lower than 620 but borrowers may need to meet additional loan requirements in order to qualify. It is best to check with your specific lender to be sure there are no additional requirements on your loan due to low credit score.
Not getting Pre-Qualified early enough in the Home Purchase process
Getting pre-qualified for a mortgage should be a borrowers top consideration when preparing to buy a home. A pre-qualification letter from a lender ensures that a Buyer has taken the necessary financial steps to prepare to buy a home and it will be required by the Realtor before he or she will show a buyer any homes for sale. “We find that many first-time home buyers wait until they have already begun house hunting online before they come and see us” says mortgage loan officer Stephen Khan.
Starting the pre-qualification process early is an important step when trying to buy a home. If a borrower thinks he/she may have some credit issues to work on, starting the pre-qualification process up to one year before the preferred closing time is not too early when it comes to credit work. Credit repair that leads to credit improvement can take some time depending on the problem, that is why it is so important to start the pre-qualification process early when a borrower knows there will be credit issues to address.
“We believe that it is never too early to set up a meeting with a mortgage loan officer to have a buyer consultation in order to prepare for a home purchase” Khan said. Some buyers may need to spend up to a year saving more money for a down payment, lowering debt, or cleaning up their credit score before making any offer to purchase a home.
A buyer consultation should include creating financial goals for the home buyer that puts them on the path to making that first home purchase. The buyer consultation will lay out a plan for the buyer to follow to be ready for the home purchase when it comes to credit, debt, and income.
Not having money saved for a down payment and closing costs
While there are still several low down payment avenues available to first time homebuyers with FHA loans being among the most popular, first time homebuyers still need to have money saved for their down payment and closing costs.
“We see borrowers all of the time who come to us late in the home buying process with little to no money saved for their home purchase” says Stephen Khan, a local mortgage loan officer. “We educate our home buyers about the down payment assistance programs available to qualified borrowers, but just in case they don’t qualify, they need to know about the standard loan programs and the down payments required of each program” says Khan.
For FHA loans which are a popular option for first time home buyers, these mortgage loans require the borrower to have a down payment of 3.5% of the home’s purchase price. In addition, buyers will also have to come up with 1 – 3% of the mortgage loan amount to cover closing costs on a home purchase.
“We can’t say it enough that we want home buyers to come to us early on in the home buying process knowing that everyone’s financial situation is different and requires unique financial planning solutions” says Khan. “If they work with us early on in the process, we will place them on the path that will lead our first time homebuyers to purchasing their first home”, says Khan
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