You decided to buy a home and put a stop to the days of renting – congratulations. Before you jump in headfirst, though, you should know the most common mistakes first-time home buyers make. By avoiding these costly mistakes, you could save yourself headaches, time, and money.
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Overlooking the Full Cost of the Mortgage Payment
First-time homebuyers often look at just the principal and interest component of the mortgage payment, but there’s more to it than that. While you do have to pay principal and interest each month, you also have to pay real estate taxes and homeowner’s insurance. Every homeowner will have to pay these bills. Some owners may also have to pay homeowner’s association dues and
private mortgage insurance on top of the regular payment.
If you overlook the ‘other expenses,’ you could find yourself in over your head before you even have one year of homeownership under your belt. Make sure you ask the lender about the full payment, inquiring about what is included.
Forgetting About Closing Costs
Chances are you have thought long and hard about how much money you are going to put down on a home. You may have even spent the last few years saving up for it. Don’t forget, though, you have to
pay closing costs too. These costs can be as much as 5% of your loan amount, which is a significant amount of money.
As you figure out your down payment, add 5% to the projected loan amount to be on the safe side. This way you won’t be faced with an unpleasant surprise when you see your Loan Estimate and learn how much the loan itself will cost you.
Focusing on the Interest Rate
It’s normal to want the lowest interest rate. Who wants to pay more than they have to pay, right? But don’t make the mistake of focusing solely on that rate. Instead, look at the big picture. We recommend you look at the
APR or Annual Percentage Rate. This is the annualized rate of your loan that includes all costs in doing business with the bank (closing costs).
When you compare the APR, you might see that a loan with a higher interest rate gives you the better deal. It all comes down to how much the lender charges for the loan. If you take that lower interest rate but pay through the nose in closing fees, it might not do you any good to take that lower cost. Instead, compare the APRs side by side as you figure out which loan is right for you.
Putting Down as Little as Possible
While it might sound enticing to put little money down on the home, it’s not always the best choice. Even if it means you can get into a home faster because you won’t have to save as much money, it may not be worth it. Here’s why.
When you put little money down on the home, you have very little equity. Now what happens if the values in your area drop? Suddenly you are upside down on your loan. Now what? It could take you years to climb your way back out. Even if that doesn’t happen, there are other reasons a decent-sized down payment can help:
- You may get a lower interest rate. The more money you have invested in the home, the less risk the lender takes. Most lenders follow risk-based pricing, which means the higher risk you pose, the higher your interest rate. A larger down payment may mean a lower risk, which means a lower interest rate.
- You may have an easier time getting approved. Again, a higher down payment means a lender takes a lower risk on you. This could mean an easier time getting your loan approved. Some lenders aren’t willing to finance high LTV loans, so putting extra money down can be beneficial.
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Changing Jobs During Underwriting
Once you apply for a mortgage, you have to freeze your financial life, including your job. Of course, you can’t help it if you lose your job because of company downsizing or any other reason outside of your control. But if you voluntarily change jobs ‘just because,’ it could cost you the loan approval.
Lenders will verify your employment again before you close on the loan. This is the case even if they verified it at the start of the process. They want to make sure that you are still at the same job and have the same income that they verified when you first applied for the loan.
If you do change jobs, it means the lender has to go back to square one. This could mean no loan approval. At the very least, it means a delayed closing and a possibly very upset seller.
Ruining Your Credit During Underwriting
As we stated above, you should freeze your financial life when you are in the midst of underwriting. Lenders
pull your credit when you first apply for the loan. They pull it again just before you close on the loan. If anything is drastically different, you could ruin your loan approval
By different, we mean a different credit score because of late payments, overextending your credit, or opening a new credit card account. We also mean that your available credit has remained the same. In other words, you didn’t go out and open a new credit card or you didn’t buy a new car with a car loan. These things will affect your debt ratio and could leave you without the loan approval you thought you had.
As a first-time homebuyer, it can be exciting to buy a home, but it can also be easy to make mistakes and lose your mortgage approval. Don’t let that happen to you. Stay in close contact with your loan officer and follow the directions provided carefully. With the right steps, you should be able to get the loan you need without any blunders.
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