It’s easy for first time home buyers to feel overwhelmed. We’ve got three important first time home buyer tips so you can avoid being surprised.
Surprise #1 – Your lender can likely qualify you for a home you can’t afford
You may have heard the saying that it is unwise to be land rich and cash poor. If you’re not careful, it can happen to you. It’s important to know your budget and what you are comfortable paying each month for your housing expenses. This is defined as your principal and interest payment plus your property taxes & homeowner’s insurance.
Some loan programs allow your total debt-to-income (DTI) ratio to be as high as 50%. Lenders compute your DTI by dividing monthly expenses such as the loan’s payment, hazard insurance, property taxes, consumer loan payments, etc., by your gross monthly income. The key here is that lenders use your gross income and not your take home pay. Of course, one cannot buy groceries or save for kids college educations with one’s gross income. It’s your take home pay that really matters and is what one uses to pay one’s monthly obligations. This is why one of the very first questions I ask a prospective home buyer is, “what loan payment do you feel comfortable paying?” This is a great place to start, because from there we can see what you can comfortably afford. If you’re talking with a lender and they start by telling you the maximum amount of loan you can qualify for, then you likely are not working with one that is in your corner.
Surprise #2 – You’ve got inaccurate information on your credit
Finding out about errors and inaccuracies on your credit report when applying for a home loan is not a good feeling. Plus, it can affect things from your loan eligibility to your interest rate. Well before you apply for a loan, check your credit at www.annualcreditreport.com. Don’t go anywhere else and don’t pay up for credit monitoring or your credit score. Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting agency and annualcreditreport.com is the legit place to get it.
Once you retrieve your report, simply make sure it contains accurate information. If it does not, then you may file a dispute. The Federal Trade Commission’s website has information about how to dispute errors on credit reports and the Consumer Financial Protection Bureau’s website provides additional guidance about disputing information on credit reports.
On the other hand, there may be an old collection or other unpaid item that you’ve forgotten about. If that’s the case and can you afford to, contact the creditor and make arrangements to pay it. Again, your credit and credit score can affect your interest rate. The difference of as little as 0.125% on your interest rate can mean the difference of thousands of dollars in total interest payments over the life of your mortgage loan.
Surprise #3 – Your new home comes with unanticipated expenses
If you are a first time home buyer then you likely haven’t had to fix a broken furnace on a Sunday in the middle of February (cha-ching). Owning your home can be a great investment, it also comes with unforeseen expenses.
I advise clients to start a separate savings account the day they close on their new home. Then, set-up an auto deposit from each paycheck. Putting a little away each pay period becomes easy and painless. In no time, you’ll have a nest egg that you can use for home or other unexpected expenses. Best case, you don’t need to spend it and then you’ve got some extra cash for that vacation you’ve wanted to take.