With the housing market improving, you might be tempted to finally start looking for a place to call home. Before you begin your home search and choose a real estate agent to work with, you should consider looking at your own situation and determine whether you are financially ready to apply for a mortgage and pay for a property.
Here are four things every first-time homebuyer should consider before buying a house:
1. Have a Good Credit Score
The first step you should take before looking for a home is to request your credit report from one of the three main credit reporting bureaus. You will then get a better idea of your financial standing as a potential homebuyer in the eyes of potential lenders. Lending standards have tightened since the housing market collapse and lenders will be evaluating applications for mortgages more carefully. As part of this process, lenders will look at your credit score to ensure you are able to handle a long-term obligation like mortgage payments, which not only includes the loan payments themselves, but also property taxes, insurance and private mortgage insurance if applicable. The minimum credit score lenders will consider is 620 and ideally, lenders will want to see a credit score that is in the mid-700s or above.
2. Hard Inquires Could Lower Your Score
When a lender has to pull your credit report, this event will be marked as a hard inquiry on your credit history. Similar to when banks will check your credit before deciding to approve you for a credit card, mortgage lenders will examine your history to determine whether your score is up to par after you apply for pre-approval for a home loan. Having a hard inquiry will potentially drop your credit score and when you are shopping around for the right lender or interest rate, the number of hard inquiries on your report could accumulate fast. Although hard inquires could decrease your credit score, there is good news as credit score provider FICO will consider all hard inquiries as one inquiry if they are made within a 45-day period. As long as you are able to get pre-approved for a loan within this time span, you can limit the hit hard inquiries will have on your score during your home search.
3. Higher Credit Score Means Lower Interest
Although you might be approved for a home loan, the interest associated with your loan may vary depending on your credit score. The lower the credit score, the more you are likely to spend on interest per month. Lenders tend to see consumers with higher credit scores as less of a risk. According to FICO, a score between 760 to 850 could result in the lowest interest rate. The chart provided by FICO shows an interest rate of 3.866 percent for consumers with this score. In contrast, if you have a score ranging between 620 and 639 – hovering just above the minimum score needed for approval – your interest rate could be 5.455 percent, which is more than 1.5 percent higher. Although an interest rate that is 1.5 percent more might not seem like a big difference, these payments add up significantly, especially with interest on a 30-year mortgage.
4. Be Prepared to Juggle Mortgage Payments with Other Bills
First-time homebuyers should plan out their house hunting budgets with their mortgages in mind. Mortgage payments can represent a huge chunk in their monthly spending and first-time homebuyers need to determine whether they can comfortably handle their mortgage payments in addition to their other bills. If buyers cannot juggle their mortgage payments with other credit obligations, they should seriously reconsider whether a home in a higher price range is right for them.
With these tips in mind, first-time homebuyers are more prepared to apply and be approved for a home of their dreams.