Buying your first home is an exciting milestone, but the choice to become a homeowner isn't one to take lightly.
For most people, their home is their most valuable asset while their mortgage is their largest financial commitment. Because of that, you can't afford to make first-time homebuyer mistakes. The good news is, avoiding them is easy if you know the mortgage myths inexperienced buyers often believe and the pitfalls first-time buyers often fall into.
Here are 12 of them to watch out for.
1. Failing to check your credit report
For most lenders, your credit score is one of the most important factors in determining if you'll be approved for a home mortgage -- and it also plays a huge role in determining the rate you'll pay to borrow.
To avoid end up paying more or being denied a loan, check your credit report and score early in the process. If there are errors on your report, you'll have time to correct them. And if your score is lower than you'd like, you may decide to wait and work on improving it before you buy.
If you already know your credit score, you can plug your information into Credible's free tool to see what kind of mortgage you can afford.
2. Not setting a budget
One of the most common first-time homebuyer mistakes is not being clear on how much you can afford. After all, you don't want to waste time looking at houses that are outside your price range or fall in love with a home that's too much of a stretch.
Use a mortgage calculator to find out what your monthly payment would be based on how much you borrow so you can make sure your payment fits within your monthly budget. Ideally, you won't spend more than 30 percent of income on all your housing-related costs.
The best place to start when making mortgage decisions is to compare rates and lenders via an online tool like Credible.
3. Saving up too little for a down payment
While you don't have to put 20 percent down on a home, you'll generally pay extra costs for private mortgage insurance if you don't. PMI is expensive and it doesn't help you -- it just protects your lender in case you default. Aim to save at least 20 percent of your home's price to avoid this added expense.
4. Forgetting to get a mortgage pre-approval letter
Knowing in advance how much you can borrow -- and that you can qualify for a loan -- is important. Fortunately, you can get pre-approved early in the process by providing some basic financial information.
A pre-approval letter gives you a clear idea of what the terms of your loan will be. And many sellers require you to submit one if you make an offer. Fortunately, you can visit an online mortgage broker like Credible to get personalized rates and pre-approval letters without impacting your credit score.
5. Neglecting to shop and compare rates
Mortgage loan rates vary substantially from one lender to another and you want to make sure you get a loan at the most competitive rate. To do that, get quotes from multiple mortgage loan providers.
Credible makes it easy to compare rates and lenders in just a few minutes, so visit the site to shop around.
When you compare rates, read the fine print so you'll know you're looking at similar loans. If two lenders appear to be charging the same rate but one requires you to buy mortgage points, it's actually much more expensive.
6. Overlooking programs such as FHA, USDA and VA loans
To help more families achieve the dream of homeownership, various federal government agencies back mortgage loans. Loans insured by the FHA, USDA, and VA, are made by private lenders but can be much easier to qualify for. If you don't have much money for a down payment or your credit isn't perfect, it's especially important to check into them.
7. Draining your bank account
Buying a home can be expensive, especially when factoring in your down payment and closing costs. Unfortunately, many first-time buyers spend nearly all their cash to get into their home, forgetting about moving expenses, furniture, and other ownership costs.
You don't want to spend every last dollar and have nothing left to cover emergency repairs or other expenses so be sure you have some extra cash set aside.
8. Applying for a loan or credit card before closing
When you get approved for a mortgage, lenders look at your debt to income ratio. If you borrow money before you close on your home, this could cause problems because you'll have higher debt costs than when you were approved. You could also end up lowering your credit score by opening a new loan.
You don't want to risk not being able to get the mortgage you were pre-approved for, or making your loan more expensive, so don't apply for any new credit until you've signed the papers and your home is officially yours.
9. Underestimating homeownership costs
Homeownership comes with lots of costs you may not think about as a first-time buyer. You'll have property taxes, insurance, and potentially homeowners association fees. You may have higher utility bills and you'll also be responsible for ongoing maintenance costs and repairs.
Think about all of these expenses before you decide that you're financially ready to become a homeowner.
10. Failing to take advantage of first-time homebuyer programs
Programs for first-time homebuyers are offered by some states, cities, lenders, and nonprofits. Some may help you get money for a down payment or make getting approved for a loan easier. They're worth looking into.
11. Getting a mortgage you don't understand
There are many different types of mortgage loans, including fixed-rate mortgages with payments that remain the same for the life of the loan as well as adjustable-rate mortgages with interest rates that can change over time. To make sure you don't get the wrong type of loan for you, don't apply for a mortgage unless you understand exactly what your payment obligations will be for the life of the loan.
You can visit Credible to get in touch with experienced loan officers and get all your mortgage questions answered.
12. Making decisions based on emotion
Many people fall in love with a home and want to make it theirs. But you don't want to buy a home that's too expensive or a poor value because you're acting based on emotions. Remember, your home is an investment as well as the place you live so make a smart financial choice.
What are today's mortgage rates?
Now that you know some of the most common first-time homebuyer mistakes to avoid, you can start shopping for your loan. The good news is, mortgage rates are near record lows.
In fact, according to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage is just 2.99 percent for the week ending July 30. This a bit lower than the average interest rate of 3.01 percent last week and well below the 3.75 percent average rate buyers faced last year.
With the Federal Reserve setting benchmark rates to zero percent to stimulate the economy during the coronavirus crisis, now is a good time to score a low interest loan. Visit Credible today to get pre-approved and see your rates.