Are you a first-time homebuyer that doesn’t know where to start? You know you need a down payment and you have to prove you can afford the mortgage. But there are plenty of financial mistakes that first-time homebuyers inevitably make. Before you get started, educate yourself on the mistakes to avoid so that you can maximize your chances of mortgage approval.
Not Saving Enough Money
You think you know how much money you want to put down on a home. You even know how much money you want to spend on a home. So you save that exact amount and then stop saving. But, what about the closing costs? They can add up to several thousand dollars as they are usually between 3% and 5% of your loan amount. On a $200,000 mortgage, that can mean as much as $10,000. You could find yourself without a loan if you don’t have that money.
Instead, figure 5% of your intended loan amount as your closing costs and include that in your savings target. This way when you apply for the loan, you can prove that you have enough funds for the down payment and the closing costs.
Using the Total Loan Amount a Lender Approved
If you secured a pre-approval, you likely have a larger loan amount at your disposal than you anticipated. Lenders qualify you for the maximum loan amount that your credit score, debts, and gross monthly income allow. This doesn’t mean you have to borrow the full amount.
Before you even start the loan pre-approval process, you should have a maximum payment in mind. When you receive your pre-approval, you may see that the lender approved you for more than you want to spend. Just because they approve you on paper, that doesn’t mean you have to spend that much, though. You should stick to what you know you can afford and nothing more.
Choosing the Wrong Loan Term
First-time homebuyers often go right to the 30-year fixed loan. While it’s the most common loan program, it’s not the only one available. Rather than assuming you need a 30-year loan, consider your options.
First, consider your plans. Is this your forever home or do you see yourself moving in a few short years? If you plan to move soon, why would you take a 30-year fixed rate loan? You may do better with an adjustable rate loan with a fixed term that equals the time you will be in the home. This way you can take advantage of the low introductory interest rate on ARMs and save money.
If you do plan to stay in the home, but are financially stable, you may want to consider a 15-year fixed loan, rather than the 30-year. You’ll cut the interest you pay in half and greatly increase the amount of equity in the home. Of course, you should compare this option to the 30-year term and make sure you can comfortably afford the 15-year payment.
Not Shopping Around for a Mortgage
First-time homebuyers often fall for the myth that once a lender pre-approves them, they have to use that lender. This isn’t the case. You are free to shop around with as many lenders as you see fit. It’s best if you do this within a 2-3 week period so your credit doesn’t get hit with more than one inquiry, though.
As you shop around, you’ll find that you get different quotes from different lenders. You may receive different interest rates or closing costs. You may even receive different options for loan programs. It’s important to compare your options so that you can decide which one suits your needs the most.
Choosing a Home Too Quickly
First-time homebuyers often make the mistake of letting their emotions get the best of them when shopping for a home. They get excited at the prospect of buying a home and make an offer on the first home they like.
Instead, what you should do is take a step back. Give yourself time to truly think about the home. We aren’t just talking about the features, but also the financial side of it. Can you truly afford the home? Do you have enough to put down on it to make the payment affordable? Don’t get caught up in a bidding war or make a bid just because you see others doing the same. You need to know if the home is right for you first.
If this home isn’t right for you, don’t worry because there are plenty of other homes out there.
Bidding the Maximum Amount
Don’t think you have to bid the full asking price of a home, no matter how bad you want it. There is always room for negotiation. If you bid low and the seller doesn’t like it, chances are they will send you a counter offer. It’s then up to you how to proceed. If you don’t want to pay the higher price, you turn it down and walk away. There are other homes that will become available.
If you make the mistake of bidding the maximum amount, one of two things could happen:
- The seller accepts your bid and you end up paying more for the home than the seller anticipated making on it.
- The seller accepts your bid but the appraisal comes back lower than your offer and you cannot secure financing.
Before you buy your first home, it’s important to get your finances in order. Know what monthly payment you can afford and save enough money to cover the down payment and closing costs. Also, make sure you know which term will suit your needs the most, allowing you to save money and get the best terms for your loan.