If you’re a renter, you likely don’t want to forever. After all, wouldn’t you rather build equity than pay a landlord? Unfortunately, some believe they are trapped in a rental cycle. If you have a bad credit score or have made financial mistakes in the past, you might feel bogged down by your financial record. However, the housing market is not closed off to you. As you branch out to see if homeownership is in your future, steer clear of these first-timer mistakes.
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Mistake #1: Not Applying for a Mortgage First
In a competitive market, if you put an offer on a home, you could lose it if you haven’t already applied for a mortgage. It may be tempting to negate this first step, but you risk missing out to another buyer, and wasting the seller’s time.
To make yourself an attractive buyer, the best thing to do is to get pre-approved by a lender. This shows a buyer you’re legitimate, and it can help you lock in a desirable interest rate. Of course, with so-so credit, it’s possible you’ll be assigned a higher interest rate. You can rectify this if you opt to buy points (aka “buy down the rate”) from your lender to help lower the rate. It’s important to determine if this is financially beneficial first, so do the math to calculate whether it makes sense for your situation. How long you plan to own the home, your loan and your current finances will dictate whether you should use points.
Mistake # 2: Go With the First Lender You Talk To
To secure a low home loan rate, you should never go with the first lender you talk to. Try to talk to a few different lenders and a mortgage broker. A mortgage broker can help you locate the best terms and rates and, in some cases, you may have better access to lenders.
First-time homebuyers have access to a few different programs. These programs include FHA loans, USDA loans and Good Neighbor Next Door programs. In an FHA loan, the Federal Housing Administration insures a portion of the loan so lenders are more comfortable lending to you. USDA loans are for those in USDA-eligible rural areas. Good Neighbor Next Door programs are for teachers, public servants and police officers. It helps pillars of the community affordable housing.
Mistake #3: Ignore Your Credit Report
According to the Consumer Financial Protection Bureau, your first step to buying a home should be to pull your credit report. Even if you know your credit score, this number does not tell you the full picture. The three major credit bureaus, Equifax, TransUnion and Experian, collect data on your credit, and they use this data to calculate credit scores, which help lenders make decisions.
Examine your report for any inconsistencies. If there are errors, send a letter to the credit bureau to dispute the inaccuracy. For credit reports with a high balance compared to income, try to pay your credit cards down to raise your score.
Mistake #4: Miscalculate the Costs of Homeownership
Finding a low mortgage rate is only one part of the hurdle. When it comes to your monthly budget, you have to take into consideration all of the different costs of homeownership. Owning a home comes with a lot of hidden expenses. Property taxes, HOA fees and homeowners’ insurance are only three of the common expenses you’ll encounter. Homeowners’ insurance costs, in particular, vary based on your location. Disaster-prone areas cost more to insure, and this will add to your overall mortgage payment.
Common misconceptions and mistakes can inhibit your ability to achieve homeownership, so you use these tips to help you see the forest for the trees. While poor credit history may force you to make some concessions to buy a home, you can still see your dreams come true.
