Seasoned investors and previous homeowners probably already know that one of the most crucial factors that affect the home purchase is the home buyer’s credit. Having a strong credit score can give the buyer an advantage when applying for a loan. It will determine whether or not your application will get approved and how much your interest rate will be. The better your score the better the rate that will be offered to you.
When planning to buy a home, it is a basic requirement to check your credit. But most first-time homebuyers tend to overlook this step and commit mistakes regarding this matter. To let you do things differently, here are 6 credit mistakes that first time home buyers should avoid:
1. Not reviewing your credit report earlier
It is a common practice for homebuyers to review their credit report. But some homebuyers fail to review their credit report early and end up not having enough time to fix the errors and concerns encountered. When you are seeing your credit report for the first time, some concerns that you may encounter may include wrong identification, wrong address information, or incorrectly reported accounts. These can have an impact on your credit score and can affect your mortgage application. Make sure to review your credit report early as these issues may take a while to be resolved. It is better to get everything resolved before you proceed with your loan application.
2. Not cleaning up your credit before applying for a loan
As mentioned in the previous point, all issues concerning your credit must be resolved before you proceed with your loan application. This includes cleaning up your credit. Unless you can purchase a home in cash, you will definitely be applying for a loan and the lenders will probably be looking at your credit score.
To have a good credit score, it is important to clear all debts and pay your bills on time. As soon as you think of buying your first home, whether it’s months or a few years away, the best thing that you can do aside from saving for the down-payment is by making sure you maintain a good credit score. The earlier you start, the more time you have to fix your credit. You should aim for a higher credit score as it will give you a higher chance of getting approved for a mortgage with lower interest rates.
3. Not getting pre-approved before house hunting
Once you have identified how much you can afford for your first home, it doesn’t necessarily mean that you are ready for house-hunting. Setting your budget wouldn’t be enough for you to be able to find your first home. It would be easier to find a home and provide a proper offer if you have a pre-approval.
Getting pre-approved has a lot of advantages for buyers. For instance, sellers will be more likely to accept your offer as they will look at you as a serious buyer. Having a pre-approval is proof that you are capable of financing your property purchase. Hence, your credibility as a buyer will be an advantage when sellers assess the offers presented to them.
4. Accepting the first mortgage offer
Another credit mistake that first-time homebuyers tend to commit is not looking at multiple lenders. If your credit score is not as good as you expect it to be, it might be tempting to accept the very first mortgage offer that you get approved for. However, this first mortgage offer might turn out to have a higher interest rate. As a result, you will end up paying more money in the long run. Keep in mind that accepting the first offer isn’t always the best decision when it comes to your mortgage.
Discuss with your real estate agent and identify what is the best strategy for you. If you do not have a very impressive credit score, evaluate your finances and assess how long it will take you to be able to raise your credit score. If you think you can fix your credit score soon, giving yourself a few more months before you accept a mortgage might be a good strategy. This will give you time to improve what needs to be improved. In return, you’ll be able to save more money as you will get to receive mortgage offers with lower interest rates.
5. Ignoring first-time homebuyer programs
Government first-time homebuyer programs are very helpful ways to help you build your down-payment through borrowing from your own RRSP or by saving land transfer taxes on your first home. Your real estate agent can help you identify and take advantage of these programs.
6. Opening credit during the underwriting process
While you are waiting for the closing of your property deal, you will definitely be excited about your move-in date. You have probably thought of the furniture that you will be purchasing for your home and how you will decorate your new home. This entails more expenses and you might have considered getting a new credit card or in-store/online financing. However, you need to keep in mind that this isn’t a good idea.
Your mortgage pre-approval is based on the credit record and debt-to-income ratio at the time you applied. Hence, adding more credit can jeopardize your loan application and approval. The pre-approval letter is not the same thing as an approval letter and may cause you grief if you have an approved purchase agreement without an escape clause if your mortgage is not approved.
After all, these six mistakes can make or break your investment. By avoiding these six mistakes, you get to save more money and make the most out of your first real estate purchase. To ensure that you’re committing to the right choice, do not hesitate to reach out to us or your real estate agent. We will always be more than willing to help you make the right choices for your first real estate investment.