For some, owning a home is one step towards the fulfillment of the American dream. It not only gives the owner a sense of accomplishment, but also a pride of ownership.
Buying a house is a great idea, but it may have a lasting impact with wrong choices, starting with a mortgage. Homeowners make mortgage mistakes all the time (like not checking for the best mortgage rates), especially first-timers. This, however, shouldn’t intimidate or scare you.
In this article, we’ll discuss mortgage mistakes to stay clear off, so as to better prepare you for what not to do.
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Not Shopping Around for the Best Lender
The problem with too many first-time homeowners is not doing much shopping around. Many people don’t realize that something small like this can add up to a big problem: coping with high fees and interest rates that could be avoided in the first place.
Just like you don’t buy a car from the first dealership you visit; it is the same when looking for home financing. Schedule a day to visit several lenders and compare notes. It’s also recommended that you get a lender first before looking for a house.
To get the best mortgage loan option, you need to decide the;
- Type of loan you want (FHA loans, VA loans, conventional mortgage loans, etc.)
- Repaying period (how long you want to have the loan)
- Kind of loan structure you want (monthly payments, interest, and principal)
Not Factoring Additional Fees
The home-buying process isn’t just paying your mortgage, and you’re good to go. It can be quite a pricey journey if you fail to do your homework or plan ahead.
There are other costs associated with a mortgage that you need to be aware of. They may include:
- Closing costs (fees and expenses required to finalize a mortgage like a survey fee, appraisal fee, loan origination fee, recording fees, credit report fee, title fees, etc.)
- Home inspection fees
- Insurance fees
- Property taxes
- HOA or condo fees
Buying More House Than You Can Afford
While it’s great to dream big, buying too much house can become a major source of stress. Getting approved for a higher mortgage loan doesn’t necessarily mean you can afford to buy a house.
Keep in mind there are additional costs as mentioned above you need to budget for, in addition to your mortgage. You are also responsible for home repairs, maintenance, and upgrades once you have the mortgage.
When you do the figuring, if you find that you’ll be making payments that exceed 28 percent of your monthly income, if you’ll be unable to save for a rainy day, if you are going to have to be dipping into your retirement savings or barely have money to cover your expenses, it’s a sure sign of buying more house than you can afford. You can avoid this by:
- Not letting your emotions guide you when buying a home
- Setting your house budget
- Not spending the maximum approval amount
- Having an emergency fund
Being house poor isn’t fun. Take your time and choose wisely.
Not Getting Pre-approved
Many homebuyers may not know the difference between mortgage pre-approval and pre-qualification. That’s pretty understandable, as it’s not as straightforward as it sounds.
A mortgage pre-qualification is simply an estimate of how much home you can afford. Neither your credit nor financial information is checked.
A mortgage pre-approval, on the other hand, means the lender has verified your credentials and financial information to approve a specific realistic loans amount. This, of course, gives you a clear picture of what you can afford, so you don’t have to waste your time looking at houses that you can’t afford.
Getting pre-approved also boosts your chances of securing your desired home. It shows the seller you are serious about buying a house. Having a smooth and easy mortgage processing is another added advantage.
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But remember: what you can afford and what you should sensibly afford are two different things.
Making a Small Down Payment
A large number of home buyers may or may not be aware that putting little to no money down comes with costs and risks. This, of course, depends on the mortgage program you apply for.
Conventional loans, for example, require a 20 percent down payment. Not that it’s impossible to buy a house with less down, but lenders like the 20 percent mark. It not only makes you less of a risk in the eyes of your lender but also earns you a better mortgage interest rate.
Putting little to nothing down also means paying private mortgage insurance (PMI). This is another additional cost that you can simply avoid. Worst part? It protects the lender, not you. Putting less down also increases your chances of owing more on your house than it’s worth.
A 20 percent down payment is a lot of money, no question about it, but it will save you money in the long run. Less debt means a lower interest rate, which translates to lower monthly payments.
Forgetting Expenses of Homeownership
A monthly mortgage bill is only one of the many expenses associated with owning a home. Aside from taxes, utilities, and insurance, you are responsible for replacing anything that gets damaged. Sometimes, things can break when being used, or your child can accidentally break a window—–things do break and need to be replaced or repaired.
Living expenses, buying equipment to make repairs, hiring someone to make repairs, and multiple sets of supplies for cleaning are some of the costs you need to be prepared for.
Not Understanding the Mortgage Terms
Not familiarizing yourself with the basic mortgage terms can be a costly affair. The terminologies can be very confusing but are not overly complicated. APR (annual percentage rate), points, escrow, appraisal, pre-payment penalty are some of the terms you should know beforehand.
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Understanding the terms of your mortgage ensures you don’t choose the wrong loan. Don’t be shy; instead, ask questions if you don’t understand. Besides, the more you know, the better and the more prepared you will be.
The most important thing to understand, however, is the different types of mortgages and how they work. A 15-year fixed-rate loan, for example, is mostly used to refinance a mortgage, whereas an adjustable-rate mortgage (ARM) has a flexible interest rate based on market conditions.
Learn the pros and cons of each mortgage type. This will help guide you towards the right option for your needs.
Failing to Check Your Credit Reports
Checking your credit report before applying for a mortgage cannot be emphasized enough. It basically shows you where you stand in terms of mortgage loan approval.
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Since it’s the lender who carries most of the risk, they might increase the mortgage rate or reject your loan application based on your credit situation. That’s why it’s of utmost importance to check your reports beforehand, to give yourself time to make improvements if needed.
Credit reports can contain errors and inaccuracies. That’s another reason to check before applying for a mortgage loan. Checking your reports from the three major credit bureaus (Experian, TransUnion, and Equifax) is easy and free. Visit annualcreditreport.com and get your copy.
Owning a home is a journey that requires a lot of planning, support, and information. Finding how much house you can afford, learning the best mortgage loan type for you, and understanding all the fees associated with a mortgage loan are the most important aspects to keep in mind.