Buying your first home is a tremendous achievement, but the journey to get there can sometimes feel like a winding road rather than a straight path. That’s why it’s important to learn as much as you can about the process and lean on the expertise of your real estate agent to help you navigate any bumps along the way.
Here are four common mistakes first-time buyers make, and what you can do to steer clear of them.
Mistake No. 1: Mismanaging Your Credit
There are many factors that can help you secure competitive interest rates on a mortgage loan, including having a high credit or FICO score. Your credit score is based upon the information taken from your credit reports and a score of 740 and above can help you qualify for the best rates. But if you have average or poor credit, the interest rates you’ll be approved for will be higher, or you might not qualify for a mortgage loan at all.
What to Do:
Before you start the home-buying process, make sure you know what your score is, review it for any inaccuracies and work to improve your score if you need to. You’re entitled to a free credit report once a year from each of the reporting agencies at annualcreditreport.com. The credit reports are free, but you’ll have to pay a fee to view your actual credit scores. Making on-time payments, using less than 30% of the credit available to you and not applying for too many credit cards will keep your score in top shape.
Mistake No. 2: Not Getting Preapproved for a Loan
Many people think getting prequalified for a home loan is enough. It isn’t. A prequalification simply gives you an estimate of the loan amount you may qualify for based on general financial information such as your income, debt and assets provided verbally to your lender. By verifying your finances including income, bank statements, tax returns and credit report, the loan consultant can provide your agent with a stronger qualification letter. Without a letter indicating that your information has been verified, you’re shopping blind and may fall in love with a home that you really can’t afford. And if you do find a home in your price range, the seller may not take your offer seriously without one.
What to Do:
If you just want to get a general idea of what you can afford, it’s OK to start by getting prequalified. But once you get serious about home shopping, provide your documentation to your loan consultant for analysis.1
Mistake No. 3: Underestimating the True Cost of Homeownership
While many first-time homebuyers are aware of how much they’ll owe for closing costs and what their monthly mortgage payments will be, they may be uninformed about other home expenses such as property taxes, utilities, insurance, and homeowner association fees. There’s also the maintenance costs that come with owning a home. According to HGTV.com, the rule of thumb is that you should plan on spending 1% to 3% of your home’s value on repairs and maintenance. So if you buy a $250,000 home, you might expect to spend at least $200 a month or more on repairs and maintenance. In addition, buyers who put less than 20% down to purchase a home will typically have to pay for Private Mortgage Insurance (PMI). PMI usually costs between 0.5% to 1% of the loan amount each year, so if you have a $250,000 mortgage loan, your PMI payment could be as high as $208 a month. SchoolsFirst FCU offers no PMI options for school employees and reduced PMI options for first-time homebuyers.
What to Do:
When you begin zeroing in on the home you want to buy, add up all these expenses to see if you can really afford it. You’ll be able to review important information with your real estate agent such as annual property taxes, monthly utilities and whether or not your home has homeowner association fees.
Mistake No. 4: Not Researching Mortgage Lenders
There are a variety of lenders on the market today including credit unions, traditional and online banks, mortgage brokers and mortgage companies. Many buyers don’t shop around for lenders to find the best mortgage loans, or focus solely on getting the lowest interest rates without comparing fees associated with the loan, including loan origination, escrow, recording, appraisals, credit report and title insurance. The amount lenders charge for these fees vary, so the impact on the total cost of the loan can be significant if you aren’t careful.
What to Do:
Shop around and get loan estimates from multiple lenders, and then compare offers. SchoolsFirst FCU offers a first-time homebuyer mortgage loan with a low down payment, low closing costs and reduced PMI. We also offer our Home Advantage Program that pairs you with an experienced SchoolsFirst FCU loan consultant and a participating real estate agent who will guide you every step of the way to help you get the best deal on your new home. Members can receive a 20% rebate from the commission of the participating agent who represents them in their home purchase—or 25% rebates from the commissions when both a home sale and purchase are completed.2
1 All loans are subject to approval.
2Rebate payment is made by First Team Real Estate or HomeSmart Evergreen Realty and is credited to your benefit at the close of transaction. Purchase price must be greater than $150,000 after all credit adjustments. All rebates are subject to limitations, lender guidelines, and other requirements. Certain properties may not be eligible for rebates. Rebate is 20% for purchase only of a residential property in California. Rebate is 25% for a residential property sale and purchase in California. In order to receive the 25% rebates, the home sale and purchase transactions must take place within six months of each other. Please consult a qualified tax professional for advice on tax implications from receiving a rebate. First Team Real Estate and HomeSmart Evergreen Realty are not affiliated with SchoolsFirst FCU.
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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.
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