Common Mistakes in Selecting a Mortgage Program

Media and advertisers are swamping television, radio and highway billboards touting competitive interest rates and favorable lending terms for homebuyers.  Realtors know that consumers don’t run into trouble based on what financial professionals tell them. Rather, it’s what they are NOT told.

This article presents the five most common mistakes made by new homebuyers.  These are mistakes that, in most cases, you simply cannot afford to make.

1. Selecting the Wrong Mortgage Program for Your Unique Situation: 
   Fifty years ago, when our parents purchased their first home, property was considered a lifetime investment and financial commitment.  In today’s world, mortgages do not come with the same level of financial obligation.
   
   There is a reason that instant mortgage refinancing leads the consumer lending industry.  Homeowners never want to be locked into a mortgage program that does not meet their immediate and future needs.
   
   The power of choice is at the fingertips of today’s homebuyers, as many more types of mortgage programs offering various levels of competitive interest rates are available on the market, just waiting to be discovered.  Although most of the available programs offer advantages for homebuyers, it is easy to get caught in the trap of a lender who is promising the world yet delivering nothing but dirt.
   
   Thoroughly investigate any mortgage program as far in advance as possible.  Select three or five programs that you believe fit your needs, and then evaluate them against each another – one feature at a time – in order to determine which program offers the best lending solution for you.
   
   Realtors have worked with many clients, helping them to determine which mortgage programs are the most efficient and beneficial according to their specific circumstances.  Your realtor would like the opportunity to discuss possible options for your particular situation.

1. Mistaking Pre-Qualification for a Promise to Lend: 
   No other term in the lending industry is as controversial as pre-qualification.  Many borrowers do not understand exactly what pre-qualification really entails.  It is rarely a mortgage approval, and even less frequently will it lock in an interest rate from a mortgage lender.

1. There is no standard definition for lender pre-qualification. The process that is generally followed is to gather information from the potential borrower in order to investigate the maximum mortgage that he or she could easily afford.  In most cases, the process does not include a credit check and the income assessment performed by the loan officer is never verified.
   
   Verification generally occurs only during the pre-approval process, which happens when a potential borrower has selected a home for purchase.  At that point, the lending agency will most likely perform a credit check and verify the reported sources of income.
   
   Unfortunately, many borrowers find that they are unable to receive pre-approval for the home they intend to buy.  This can leave the borrower frustrated and unhappy with the lender.
   
   Only when the lender issues a check for the home purchase is the loan a certainty.  If you realize this before beginning the pre-qualification process, you can be better prepared for the outcome of the pre-approval and final approval process.
   
   Your realtor should strongly recommend working with a reputable mortgage lender who is willing to explain the pre-qualification and approval processes to you with explicit definitions of each step in the borrowing cycle.  When you ask questions about definitions, often you will discover that there are multiple options available to you as a borrower.
2. Making Major Purchases Close to the Time of Home Purchase: 
   Many people do not realize that even if you have never missed a payment in your entire life, making a major purchase like a car during the mortgage shopping process is a bad idea.
   
   Lenders look at your credit history at the time of loan approval, but they are looking at far more than just your payment history.  They will perform a review of the amount of credit accessible to you at the time of your application, and they will look at the amount of credit that has already been issued.  Excessive borrowing, even when your payment record is spotless, is a red flag for potential lenders.
   
   Potential borrowers with spotless credit may actually be denied a mortgage, or offered a lower approval amount than those whose credit is slightly blemished. How can this be? Well, a borrower with spotless credit, who has recently purchased a new car and boat, has just assumed a large financial liability should he or she experience a financial hardship.  In contrast, a potential borrower with blemished credit who has kept up on payments without adding additional liabilities actually poses far less of a lending risk to the institution.
3. Failing to Investigate First-Time Homebuyer Programs: 
   Because interest rates have begun a steady increase, realtors are advising potential homebuyers to get pre-approved and to lock in favorable loan terms as soon as possible.  First-time homebuyers are encouraged to search carefully for a mortgage lender that offers first-time buyers a special mortgage plan.
   
   Your realtor can offer you information on first-time buyer programs that can save you money and help you to determine whether you might qualify for such programs.
   
   Potential homebuyers, who heed realtors’ advice and research several lenders and their incentive programs find themselves in a better financial situation after the purchase of their home than those who opt to ignore the realtor’s advice.
   
   This is easily understandable, considering that first-time homebuyers may find themselves eligible for grant money to cover closing costs, reduced interest rates and better repayment options.
   
   Many potential borrowers do not participate in first-time homebuyer programs because they are unaware of the option.  Realtors have done a lot of research about such programs and direct buyers to the programs with which I are familiar.  However, it is truly the responsibility of the buyer to investigate all the options that might be available.
   
   Generally, lenders offer first-time homebuyer specials, loan products directed at first-time buyers, and other interesting options. However, the most useful first-time buyer programs are not offered by private lending companies.  Rather, they are offered by state and federal agencies, who realize the difficulty some borrowers face when trying to save money for a down payment, or even closing costs.  A variety of programs are aimed at first-time homebuyers.  Contact your local state or federal housing office in order to find out what assistance programs may be available to you.
4. Paying Unnecessary Fees to a Lender:
   Perhaps the most common error among borrowers of any type is that they do not ask enough of the right questions.  A smart consumer will interview a potential mortgage lender as though the lender would be working daily for the consumer.  If you think about it, the lender who provides the purchase money for your home really DOES work for the consumer.
   
   Because the lender is working for the borrower, it seems unreasonable for lender to attach unnecessary or unreasonable fees to its lending contracts.
   
   One commonly over-inflated fee, assessed by nearly every lender, is the price of a credit report.  Borrowers who realize that the average cost to request a credit report is less than $20 already know to dispute the lender’s credit report fee, which often is $150-$200.
   
   Document preparation and handling charges are two other examples of how lenders attach inflated fees to their contracts.  In today’s world, very few lenders actually complete forms and documents without the assistance of a computer.  And in the age of instant gratification, most documents are emailed to borrowers.  Since email is much less expensive than a stamp and computer screen displays do not require ink, there is really no reason for an exorbitant documentation fee to be charged.
   
   As a borrower, you need to request a fee listing as part of your mortgage program comparison.  By simply asking about the lender’s fees, you may find out that smart consumers pay significantly less than those who never ask.

When you are shopping for a home and a mortgage program, the rule of thumb is to ask too many questions.  By asking all of the right questions, you stand to receive better loan program offers from lenders.  Lenders know how to spot smart consumers and they will show respect for your commitment to find the best options by charging you far less than they would if you were unprepared.

Asking the right questions is the key to protecting your financial future. Feel free to contact your realtor with any questions that you may have about different mortgage programs.  Your realtor’s experience and expertise are at your disposal and hopefully can help you recognize potential problems with loan programs and even particular lenders.