Mortgage Mistakes to Avoid
Mortgage mistakes cost consumers BILLIONS of dollars each year in unnecessary fees and interest and to make sure you are not one of them you really need to understand the ins and outs of mortgages. Here are 10 common mortgage mistakes to avoid. They are in no particular order, each one of these mortgage mistakes could end up costing thousands.
Mortgage Mistake #1 - Not Getting Your Finances In Order
Not getting your finances in order can be a very costly mortgage mistake from which many other mistakes often derive. Before you even consider looking at houses or applying for a mortgage it pays to accurately know your current financial status and to ensure that your finances are looking as good as they can. Knowing your financial position and what you can afford is key to achieving the right mortgage choice. The financial groundwork should include:
- An accurate assessment of your financial position including, Income & Expenditure worksheet and Assets & Liabilities list. This information will tell you what you can really afford.
- Making sure your finances are putting their best foot forward - A concerted effort at paying off debt and removing liabilities will improve your financial status.
- Having your financial Documents to hand - The better documented you are the more likely you are to qualify for a prime mortgage.
- Have a recent copy of Your Credit Report - see Not Fixing Your Credit
Mortgage Mistake #2 - Not Assessing Needs or Doing Research
Knowing what you want is key to any success. Before looking at homes it is important to know exactly what kind of home you are looking for and doing a genuine assessment of your needs. Failure to do this will mean that the kind of house you buy will be determined by what others say you can afford rather than what you need. Many realtors and lenders will ask what you can afford before asking what you NEED.
By knowing what you want and researching what locations and prices would suit your particular requirements - You take control and are less likely to be coerced or persuaded by lenders or realtors to stretch your budget. You can direct the realtor as to what you are looking for and what price range, rather than them telling you. Buying on the basis of what you need and sticking to your budget could knock tens of thousands off your mortgage costs.
The more you research and understand the different mortgages and the housing market you are considering buying into, the stronger a position you place yourself in, in terms of negotiating, spotting problems and getting the best deal on your home and on your mortgage.
Mortgage Mistake #3 - Choosing The Wrong Mortgage
There are so many variations of mortgages that it can be very confusing. Getting into the wrong mortgage can be a very expensive mistake. Mortgages boil down to two real types, fixed rate (FRMS) and adjustable rate (ARMS) and each have several variants. There is little point in securing a 30 year FRM with high closing costs or a mortgage with pre-payment penalties attached, if you intend to move in a couple of years. Another example would be taking out a ARM with a low initial discount rate, with no certainty that you can cover the payments when the mortgage reverts to the full rate. Such mortgage mistakes are very costly, but easily avoided with a little bit of thought and common sense.
Generally your needs and circumstances will dictate the kind of mortgage that best fits your need, so it is important to do the research and know your financial requirements. Take some advice, get expert opinions and the right choice normally becomes fairly clear. For more details on selecting the best mortgage for your circumstances see - Selecting the Best Mortgage.
Mortgage Mistake #4 - Not Fixing Your Credit
This is a common and serious mortgage mistake that can cost many thousands and create a great deal of difficulty getting a mortgage approved. It is vital to always obtain a recent copy of your credit report and check it for errors and negative entries. It is estimated that nearly 70% of credit reports have some error or other attached to them. If you do not challenge errors they will affect your credit score and could result in you paying many thousands of dollars more for your mortgage.
It is a good idea as part of your financial analysis (See Mortgage Mistake #1 ) to obtain a copy of your credit report and FICO credit score, ideally at least 6 months BEFORE you apply for a mortgage. This will give you time to challenge any errors and try to clean up any negatives on your report. You can order your FICO score on the Web for a fee of $14.95, which includes a copy of your credit report.
If your credit history is not in great shape there is a great deal you can do about it. You do not have to hire one of those expensive Credit Repair companies, you can do it yourself. The Credit Secrets Bible is an ideal book for taking you through the process.
Mortgage Mistake #5 - Not Getting Loan Pre-Approval
Pre-Approval of your mortgage loan is not the same as being "pre-qualified". Pre-qualification is simply an opinion by your lender of what they think you can borrow based on the financial information you give them and how much you have for a down payment. Information is not validated and no checks are done and whilst this may be a useful initial exercise it really carries very little weight. You should consider "Pre-Qualifying" yourself as part of your financial analysis.
In a pre-approval on the other hand the mortgage company does all the work of a full-approval, except for the appraisal and title search. And if everything is OK they will approve the loan in writing. Many mortgage companies will pre-approve you for free or for a small charge and it very much worth doing.
If you are not pre-approved you will always run second-fiddle to all the other purchasers you are competing with in the housing market. Often realtors will not show some properties unless you ARE pre-approved. When it comes to negotiations over price the buyer with pre-approved finance in place will have a strong negotiating edge and will generally be preferred by sellers. These advantages are important and can save a great deal of time and money on your final property purchase.
Mortgage Mistake #5 - Borrowing Too Much Money
People often end up over-buying and borrowing far more money than they can really afford. The consequences of this manifest as dramatically increased levels of financial stress and anxiety. Any pleasure in obtaining a beautiful home is often overwhelmed with the trouble that this kind of mortgage mistake creates.
The secret is to stay within the financial budget you have set yourself, do not allow yourself to be persuaded otherwise. Lenders and Realtors are quite happy to allow or even persuade you to over-spend, they have big commissions at stake and do not have your best interests at heart. In addition the extra costs of home-ownership add up to an often surprising large amount of money to be found on top of the mortgage, the amount often catches out the unprepared. Be strong, your financial freedom and happiness hangs on your ability to stick to your guns.
Lenders are usually happy to allow you to stretch yourself up to payments of 33% of gross income, a level recommended by most financial planners is closer to 25%. The choice being made is one between financial freedom and financial chaos.
Mortgage Mistake #6 - Paying Unnecessary Mortgage Fees
Many people get caught out at closing by inflated or unexpected fees. Sometimes this is because they simply did not pay close attention to the fees when the loan was originally negotiated or the lender has inflated his fees and only revealed them at the last moment when it is too late to back out. The later is a well publicised issue that the federal government has so far done little about, however in both cases there are things you can and should do to protect yourself.
- Clarify & Negotiate Lending Fees Early- The fees that the lender has nearly full control over are known as "lender fees", these are normally outlined in dollar amounts. These fees should be part of costing each mortgage and be part of the process of selecting a lender. Get these fees in writing and if possible, a written undertaking to quarantee them through to closing. No all lenders will agree to do this, find another who will. Any lender worth his salt will know the fees, any reticence to lay them out for you in writing should be a warning sign. Don't forget to negotiate!
- Read & Question Fees in the 'Good Faith Estimate'. Get a complete clarification of the terms in writing. Verify that the terms are as agreed. Check for things like pre-payment penalties and origination points. If in doubt ask.
- NEVER rely on verbal assurances, always seek clarifications and terms in writing and if you don't get clear answers, find another lender.
- ALWAYS READ the HUD-1 The HUD-1 is the first legally binding document that you will receive that lays out all the terms of the loan you are about to sign. Most people only ever see this document just before signing but you can and should ask to see it in advance. You can normally get a copy two or three days befor signing is due. DO IT, and read it carefully to make sure that the terms are as agreed, you will give yourself time to consider the best action if things are not as they should be.
- Use Online Lenders. Online lenders tend to be far more transparent about their fees & terms and often publish these online. They are far less likely to "pull-a-fast-one" and they are well aware how important it is to maintain a good reputation online. A list of reputable online lenders can be found here.
- Shop Around When shopping around and doing comparison shopping for your mortgage, take Fees into account
Until the federal government takes action to close-down the shynanigans played but some of the less reputable lenders at closing, you must take every precaution to protect yourself. For more information on other tricks & traps of the mortgage market read - Mortgage Tricks & Traps.
Mortgage Mistake #7 - Not Getting a Professional Inspection
Not making your purchase contingent on a satisfactory home inspection could be a costly mistake. Your home purchase is a large financial transaction, you should apply due-diligence and make sure that the dream home you are buying has no hidden nightmares. Independent home inspectors carry out a though inspection of the house and provide a detailed report of its state and condition. The money spent on such a report is well worth the peace of mind it brings.
Mortgage Mistake #8 - Not being Ready for Mortgage Closing Costs
Closing costs typically include things like attorney's fees, taxes, title insurance, prepaid homeowners insurance, points and other lenders' fees. They can add up to gut-wrenching 2%-7% of the house price and you will be expected to write a check for the money at closing, when you are due to receive your loan.
Your "Good Faith Estimate" should have given you a good idea of what these fees were going to be ( see - Mortgage Mistakes #6 Paying Unnecessary Mortgage Fees ). You need to make sure you have the funds to hand and that they have been fully accounted for in your original calculations. Failing to do this may lead to some difficult and unwise options for trying to cover the costs - such as putting the money on your credit cards.
Mortgage Mistake #9 - Not Shopping Around
One of the benefits of sorting out your mortgage BEFORE you start home hunting in earnest is that you have the opportunity to thoughly research what is available in a dispassionate way and not under the pressure and heat that often exists around an actual home purchase.
Do not accept the first loan offer that comes along, look to obtain at least three with at least one of them being an online quote. The benefits of online shopping is that everything is much more transparent and straight-forward. Failing to shop around is a huge mortgage mistake that could cost many thousands. Once you have all your details and financial numbers prepared, making several applications is as easy as one and will result in savings.
Mortgage Mistake #10 - Not Getting Your Attitude Straight
It is a common mistake that people feel somehow grateful to be considered for a loan and trust that everything they are being told is true and that lenders have their interests at heart. This completely misunderstands the nature of the relationship and can set you up to be taken advantage of. In reality, the borrower have most of the power. If they walk away from a deal, they can go find another lender, the lender gets nothing and will lose out on a very lucrative deal. They should be grateful for your business, remember it.
To avoid mortgage mistakes, it is important that a home buyer must clearly establish the attitude that they; and only they - will be responsible for the payment of the mortgage. No one else will be responsible, not the lender, not the Realtor, not friends or relatives. Others often have very different agendas, you must take sensible decisions, based on common sense that are right for YOU and no one else.
Remember, it is YOUR financial freedom that is at stake, it is YOU who will have to find the mortgage payments each month, it is YOU who will have to forgo vacations and other dreams to meet those payments. Decide now to make only choices that are right for YOU.
Realtors & Mortgage Lenders will all try to 'guide you', but it is important that no matter how well intentioned or otherwise such guidance is, to remain aware that they are running on very different agendas and often these are incompatible with your best interests. It is important to take on a firm attitude and only work with people you trust and who are prepared to respect and honor your wishes.
Deal honestly with everyone and demand absolutely that they do the same with you.