When buying your first home, there are many mistakes that can cost you thousands and hinder the process to get you into the home that is right for you.
One long-standing program that has assisted millions of first-time homebuyers is the FHA (Federal Housing Administration) mortgage program. An FHA loan is a loan the government agency insures against default. Approved lenders can issue these loans, which tend to be less restrictive to borrowers facing economic hardship.
Here are a few common mistakes to avoid when considering an FHA loan for your first home:
- Failing to consider an FHA loan. If you are thinking of purchasing a new home, considering an FHA mortgage could be a vital step. The FHA program allows lenders to offer home loans to borrowers with limited or less-than-perfect credit histories. While FHA mortgages require that you pay a mortgage insurance premium, FHA mortgage rates could be lower than you would get otherwise.
- Making a major credit purchase immediately prior to applying for a loan. Your debt-to-income ratio is a major determining factor in whether or not a lender will approve your loan application. Your debt-to-income calculation is based on your current debts and the percentage of that debt against your income. Major credit purchases will seriously alter that ratio sometimes enough to significantly hurt your chances for obtaining an FHA loan. You can also improve your debt-to-income ratio by paying off credit card balances or other outstanding loans.
- Not reviewing your credit report. An FHA-loan approved lender will always look at your credit report and credit score. Your credit report gives the lender an idea of your debt, your ability to pay your bills on time, and your overall credit reliability. Before you apply for an FHA loan, review your credit report and score. It could contain errors that could affect your ability to purchase a home. Once you’ve carefully reviewed your credit report and are confident in your credit history and score, you should initiate the preapproval process.
- Neglecting to save enough money upfront. While an FHA loan generally requires a lower down payment than other loan types, there are still upfront costs involved in an FHA mortgage. Ensure that you’ve budgeted carefully and saved enough for the necessary down payment. There are also fees and expenses due at closing for things such as mortgage processing, insurance, home inspection, and lawyers. Make sure you have a generous amount of savings above and beyond your down payment to cover any closing costs and upfront expenses.
FHA loans have helped countless homeowners in the past. An FHA mortgage may be a good fit for you as long as you avoid these common mistakes.