As you begin the process of searching for your first home, it helps to understand the financing process. Here are four common money-related mistakes made by first-time homebuyers and some tips to help avoid these pitfalls.
1. Over-Committing Your Spending Power
Mortgage lenders often qualify potential buyers for home loans based on their debt-to-income ratio. This ratio does not take into account any of your fixed expenses like utilities, insurance or taxes, says Forbes. Some first-time homebuyers over-commit their spending power by borrowing the entire amount of the loan for which they are approved, says U.S. News and World Report. This may lead to little flexibility in your monthly budget for fixed expenses and also any unforeseen repairs or maintenance costs for your new home, says U.S. News and World Report.
Prior to meeting with a mortgage lender, you may want to determine how much you can comfortably afford to borrow and still meet your fixed expenses, build your savings accounts and adjust for potential changes, like a job change or children, says Forbes.
2. Failing to Be Preapproved for a Loan
Once you run the numbers and determine your housing budget, talk to your mortgage lender about getting preapproved. When you are ready to put an offer on your dream home, having a preapproval letter may put you in a stronger position against other bidders who did not get preapproved, says Trulia.
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3. Not Knowing Your Credit Score
A credit score can help mortgage lenders learn about your credit history and see what type of a borrower you might be, which may help determine your interest rate.
If you don’t know your credit score, you may want to consider getting a copy of your FICO score from each of the three major credit bureaus. You can receive a free copy of each credit report at AnnualCreditReport.com once every 12 months.
Trulia suggests checking your credit score at least three months before you begin house hunting. If you find any errors in your reports, this may give you some time to correct them.
4. Not Understanding Your Financing Options
Make sure to understand the pros and cons for each home financing option, whether it is a 30-year fixed rate mortgage, a 15-year fixed rate mortgage or a five-year adjustable rate mortgage, says Realtor.com. Your situation and how long you plan to stay in your new home may help you determine which financing option is right for you, Forbes says.
With enough time and preparation, you may be better prepared to make smart financial decisions as you mark the milestone of purchasing your first home.
Originally published on July 9, 2012.
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