Avoid the Most Common Mistakes in Getting a Mortgage

When you are in the market for a new home, you need consider how you will pay for the property that you want to buy.  Most people do not have enough assets to pay for the home up-front with cash.  Therefore, you will need to borrow a mortgage loan.  When reviewing mortgage programs and individual lenders, you need to consider interest rates, repayment terms, APR, points, buy-downs, closing costs and of course the inevitable down payment.  This means that there is a lot of room for error on the part of the borrower.  Fortunately, with a little time and attention, you can avoid making the most common mistakes in getting a mortgage.

The mortgage process can overwhelm even the best educated consumers, especially when they are buying their first home.  Just the sheer amount of the loan and the long-term commitment leave some borrowers feeling as though their lives have changed forever.  Of course, their lives will change – but for the better!

Here are some of the most common mistakes that potential borrowers make, causing the mortgage application process to become much more complicated than it needs to be.

Not checking the credit report: Educated, intelligent consumers know exactly what appears on their credit report, and they check that information before applying for new credit.  This is particularly true before applying for a mortgage loan. In addition to the contents of the credit report, borrowers should know their FICO credit score.  Having this information gives the borrower clear expectations about the type of loan that the lender will offer.  This information also lets the borrower know whether he or she qualifies for the most competitive interest rates.

Not fixing errors on the credit report: When you want to purchase a home, start preparing early by ordering your credit report a few months before you plan to go through the lender pre-approval process. Then carefully review the items listed on the report and dispute any incorrect information.  This will also give you adequate time to pay off any outstanding debts and pay down loan balances in order to give yourself a more favorable debt-to-income ratio.

Not investigating home-buying assistance programs: Unfortunately, many buyers fail to investigate the assistance options available to first-time buyers, single buyers, low-income buyers, etc.  For the purpose of these programs, a first-time buyer is an individual who has not purchased a home in the past three years.  Many lenders offer specific programs to simplify the mortgage application and closing processes for first-time buyers. However, the lenders may not volunteer this information, so the borrower needs to ask about the available options. In addition, some programs are designed to help borrowers who have a blemished credit history.  It is absolutely necessary to investigate all possible programs and options before buying a home.

Skipping the pre-approval process: Pre-qualification and pre-approval are two entirely different processes that lenders use to screen potential borrowers.  Pre-qualification is less complicated and formal, and is the process whereby a lender helps a borrower determine the amount that he or she might be qualified to borrow simply based upon income and major debt payments.  Pre-approval takes this process one step further and involves the lender looking at the potential borrower’s credit report and FICO score, as well as the debt-to-income ratio.  The pre-approval process is the lender’s way of determining whether or not it will extend a loan to a potential borrower and, if so, for what amount.  The potential borrower must complete a mortgage application and submit all the requested documentation prior to receiving pre-approval.

The benefit of pre-approval is that in today’s real estate market, agents and sellers take pre-approved buyers much more seriously and tend to accept their offers over those of merely pre-qualified buyers.

Under-borrowing: Many first-time homebuyers make the mistake of borrowing less than they really need when purchasing a home. This is also known as “buying on future income expectations,” and it can be very problematic. Part of the problem lies with first-time buyers who have not adequately learned about the true costs of home ownership.  In addition to a mortgage payment, which may be equal to the amount that they previously paid in rent, the buyers will need to pay taxes, utilities, trash disposal fees and insurance.  They will also need to have funds for inevitable home maintenance and be prepared for health crises or other emergencies. Realistic and educated buyers will base their mortgage on what they can comfortably afford at the time of purchase, with the hopes that when their income increases they will be able to maximize their savings by paying down their loan more quickly.

Not researching lenders: The fact that a Certain lender was a good choice for your parents twenty years ago does not mean that the lender is right for you today. This is lesson that many first-time homebuyers learn the hard way.  Borrowers who are familiar with current interest rates and market conditions research several lenders before finally selecting the one that is best for their particular situation. Less prepared borrowers may find that they have opted for the wrong lender, and therefore have a mortgage rate that is not competitive with typical rates in the market.  First-time buyers who decide to work with a mortgage broker must carefully examine the programs and lenders being offered to them.  Most consumers are unaware that mortgage brokers make more money on loans for people who have less–than-stellar credit.  So, if you are working with a broker, be especially cautious about your decision.

Not questioning lender fees: Believe it or not, some lender fees are negotiable.  One commonly overpriced fee associated with mortgage loans is the documentation fee.  In most cases, today’s lenders feed information into a computer (or have the borrower enter the information online) and then the computer generates all the required forms and disclosures.  Therefore, there is no reason to pay hundreds of dollars for this fully automated service.  Begin by asking the lender why the fee exists and whether it can be waived. Also, watch the credit report fee that is assessed by your lender.  A credit report usually costs the lender around $20.  Therefore, a fee of $200 is extremely over-inflated and should be reduced without argument.  Find out ahead of time what fees your lender plans to assess, so that you are not caught off guard at closing time. Once the final papers have been signed, you will be unable to get the lender to reduce the fees, so make it known ahead of time that you will not pay over-inflated or unjustified fees.

Not having adequate cash on hand to cover closing costs: On the day of closing, a homebuyer must pay in entirety a number of costs associated with the home purchase transaction.  These could include, but are not limited to, insurance premiums, prepaid property taxes, transfer fees, attorney fees, points and lender fees.  A first-time buyer may be caught off-guard by the total expense.  Be prepared ahead of time for any additional expenses that may arise at closing. In general, if you have about 10% of the purchase price of the home on-hand, you will be more than prepared to cover the closing costs.