Buying a home is the most expensive purchase we will ever make, and a mortgage is probably the biggest debt we will ever carry. That's why it's very important to avoid mistakes that could cause you to pay more than you should and instead get a great rate for an affordable property that will make you feel as if life couldn’t be any sweeter. If you’ll be in the market for a new place soon, make sure you avoid the following mortgage mistakes.
Making Yourself House Poor
Committing too much of your monthly income to housing-related costs means that you will have little or no money left over for anything else. So when you're figuring out how much house you can afford, make sure to factor in other important expenses besides just bills — things like saving for retirement, emergency expenses (medical, car repairs etc.), and even the cost of furnishing your brand new home. Spending less than 25% to 28% of your pretax income on housing is the fundamental, rule for determining how much you can truly afford to spend. Make sure to include in your housing costs not just mortgage payments, but insurance fees, taxes, and any homeowners’ association fees. What the bank says you can afford (based on how much they'll lend you) may not actually be what you can actually afford. For instance, if you earn $75,000 a year, that means you shouldn't devote more than $1,750 a month to mortgage payments, insurance premiums, taxes, and association fees. Many first-time homeowners are surprised by all the expenses associated with owning a home, so it's crucial that you are prepared when it's time to transition to being a homeowner.
Not Shopping Around for the Best Rate
The average consumer searches for the best deals on groceries, services, furniture and cars, but most fail to look for the best mortgage rate. Mortgage borrowers often consider only one lender or broker and don’t shop around before applying for a mortgage. That's the wrong way to go about it. You'll want to get quotes from multiple lenders. Check with a local bank, as well as a credit union, and get an online quote or two. Credit unions in particular offer creative mortgages that can save you money. But know this: Each time a lender pulls your credit to give you a quote for a mortgage interest rate it will ding your credit score. You can minimize the potential damage to your credit score by getting all quotes within a 14-day period, so it doesn't look you're applying for multiple loans from multiple lenders each time.
Not Understanding Your Mortgage Terms and Ignoring APR
Don’t just sign on the dotted line without understanding what the heck your mortgage entails. Some lenders will advertise low interest rates but they make up for them with high fees. You need to compare annual percentage rates (APR) from lenders’ Truth-in-Lending disclosure forms to see which mortgage really costs the least. The APR includes lender fees and shows the loan's true cost. For example, a $100,000 30-year fixed-rate loan with an interest rate of 3.85% where the lender charges two points, a 1% origination fee, and $1,500 in other closing costs has a 4.215% APR. The same loan at 4.05% with no points, a 1% origination fee and $800 in other closing costs has a 4.199% APR. The first loan looks cheaper because of its lower interest rate, but it costs more in the long run and requires you to bring more cash to closing. You need to see all this in writing. If you don't quite understand the documents you're about to sign, ask a lawyer, your real estate agent, or even family member or friend, to review the terms of the loan with you. You can do this ahead of time, but even if you get to the actual moment of signing and still don't understand something, it’s better to walk away than to make an expensive and potentially life-altering mistake.
Putting Too Little or Nothing Down
In general, you need to have a down payment of between 5% and 20% to qualify for a conventional loan. And if you put down less than 20%, be prepared to pay mortgage insurance — an extra cost that typically adds $100 or more to your monthly payments. It can take two to seven years to build enough equity, or sufficiently lower the outstanding balance, to cancel the private mortgage insurance (PMI). FHA loans require upfront mortgage insurance that can be rolled into the amount borrowed as well as an annual premium that is a percentage of the loan balance. FHA loans require mortgage insurance until the loan is paid in full.
Not Reviewing and Fixing Your Credit Reports
Before you start the home buying process, you'll want to make sure your credit score is in good shape. At least six months before you go to your first open house, you need to get credit reports issued by the big three reporting agencies: Experian, Equifax, and TransUnion. You can go to AnnualCreditReport.com and request copies of your credit report. You can get a free copy from each of the three main credit bureaus every year. Review the reports and pay off any delinquent bills as soon as you can — before you go to qualify for a mortgage. If you see any errors, dispute them immediately because any mistakes could lead to a higher mortgage rate or even loan rejection. In addition to your credit reports, it’s also critical to see your credit score. Some banks and credit cards now offer the most widely used credit score, the FICO score, as a monthly perk for their customers. If you’re not lucky enough to have access to a free score, you’ll have to pay FICO to see yours.
Not Going with a VA Loan if you Qualify
We think VA loans are the best mortgages for pretty much anyone who can qualify for one. Millions of veterans, including those on active duty, the National Guard, and reserve units, are eligible for VA loans These loans are some of the best because:
- The VA makes sure buyers don't overpay for a home and that it's move-in ready, without any costly, unexpected problems.
- There’s no down payment on purchases (check for limits in your area) and charges no mortgage insurance.
- The types and amounts of closing costs are tightly restricted.
- Interest rates are very competitive, even if you have relatively poor credit and lots of debt. In most cases, you'll pay the same interest rate as borrowers with a 760 credit score and a 20% down payment.
- The only financial drawback to a VA loan is what's called the “funding fee”, which can range from 1.5% to 3.3% of the amount you're borrowing. The fee can be added to the loan so you won't have to pay for it up front. If you have a service-connected disability, the funding fee is waived.
Failing to get Pre-approved
It's very important to get pre-approved for a mortgage before you start looking for your new home. By doing this, you can get an idea of what kind of home you can afford and what the monthly payment might look like. Getting pre-approved can also help avoid the disappointment that comes from losing a house you’ve fallen in love with. It may also give you a competitive edge if there are multiple offers for the same property. A seller will feel more confident selecting a bid from someone with a mortgage preapproval rather than a person who hasn’t even begun the process. Remember, what the bank thinks you can afford and what you can actually afford may be two different things.
Failing to Negotiate Junk Fees
While you’re investigating rates, don’t forget that many mortgages come packed full of all kinds of junk fees. Some, such as your county recording fee, are likely fixed, but many of them can be negotiated down or away altogether, but the key is knowing what to expect so you can take action. Before your closing, you should be provided with a “good faith estimate” of the fees. Ask your lender to review what they are for and then see if you can negotiate a lower price. And ask your real estate professional to help you with the negotiation process. These are a few of the fees likely to have the most wiggle room:
- Loan origination fee
- Application fee
- Broker fee
- Underwriting fee
- Sign-up fee
- Document preparation fee
- Messenger fee
- Loan origination fee
Not Shopping Around for the Right Home
Look at lots of homes! You can do most of the preliminary searching online, but be sure to go look in person. And ask your real estate professional to provide you with some market reports specifically on the neighborhoods you’re interested so you can see what has been selling and where prices are going up or down. Start getting a good understanding about the neighborhoods you're considering buying in. Does it have all the qualities you're looking for? Have you driven or walked around the area at night? You don't want to buy a house you love only to realize you're stuck in an area you aren't comfortable or happy with.
