Avoid These Mortgage Mistakes

May 30, 2006 |

Let’s face it, we all make mistakes.  One place time that you definitely want to avoid making mistakes, whenever possible, is applying for a mortgage.  The last thing you want to do is make a mistake that you pay for over 30 years– with interest.

So if you want to avoid making mortgage mistakes, take a look at this article.  In case you don’t want to read the whole thing, I will list the 8 mortgage mistakes the author talks about, and add my own insights:

1) Not fixing your credit:  This is a big one.  A small difference in your credit score can mean a HUGE difference in the amount of money you end up paying over time.  Your credit score is a major factor in determining what interest rate you receive, so you want that score to be as high as possible before you get the loan.

2) Not looking for 1st-time home buyer programs:  If you are a first-time buyer, do a little research and see if the government or any private lenders are offering special programs or incentives for you.  If you aren’t a first-time buyer, perhaps you are in a profession that is eligible to take advantage of some of these programs.  There are many programs for public servants such as police, firefighters, and teachers.

3) Not getting pre-approved for a loan:  As the article points out, there is a difference between "pre-approval" and "pre-qualification."  Get a pre-approval letter as soon as you can.  Presenting a pre-approval to sellers shows that you are serious and shows that you definitely can buy their home.  It gives you much more leverage when putting an offer on a home.

4) Borrowing too much money:  I tell my clients this all the time, "You don’t have to spend it just because the bank will give it to you."  There is ABSOULETLY NO REASON to spend all the way to your limit.  The bank is going to give you a range in which you can spend.  A good idea is to spend at least 5-10% less than what they are willing to give you.  This amount is a huge difference over 30 years.

5) Not shopping around for rates and terms: You should ALWAYS compare rates and terms for loans with different lenders.  Even if your mortgage broker is your best friend or family member, you owe it to yourself and your family to make sure that you are getting the best financial deal possible in order to ensure security for the future.  If your friend or family member doesn’t have the best rates or terms, negotiate with him or her.  If they are a true professional, they will understand your position.

6) Paying junk fees:  This can be a one that is hard to find.  Make sure that you examine very closely the Good Faith Estimate you receive from your lender.  If you see any fees that you think are a bit out-of-whack, ask about them.  Maybe they can’t be reduced, maybe they can, but you deserve to know what all the fees are for.

7) Not planning for closing costs:  This is very important.  Many people go to buy a home and have to ask the seller to credit them for the closing costs.  This is not a good idea, if you can at all avoid it.  $7,000-$10,000 added to the price of the home for closing costs doesn’t seem like a lot to most people, but if you had that money and could pay for it yourself, you wouldn’t be financing it over 30 years– plus interest.  Plus, having closing costs added to the price of a home means that the home is going to have to appraise for that additional amount.  Sometimes, this can be a risky proposition.  Having closing costs financed falls in the category of KISS (Keep It Simple Stupid).  Why add something if you can avoid it.

8) Not having enough cash on hand after closing:  This goes hand-in-hand with #7.  Make the effort to save enough money so that you can pay your closing costs AND have money left over after closing.  As the article points out, 3 months reserves is probably a good idea.

If you can keep these 8 things in mind when you go to apply for your mortgage, you will be off to a great start.

Posted by Daniel | Filed Under Buying, Finance 

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