Mistakes Mortgage Loan Shoppers Make – And How to Avoid Them
Buying a home, and applying for a mortgage, is likely to be the most
significant single financial decision you ever make. It is vital,
therefore, to learn from the mistakes other mortgage shoppers have made,
and to avoid making those mistakes yourself. Some of the most common
pitfalls encountered by mortgage shoppers are:
Not taking advantage of programs designed for first time home buyers
If you do not take advantage of the various programs designed for first
time home buyers, you could be throwing money away. These programs,
generally sponsored by city, state or county government agencies, are
often able to offer lower interest rates and better terms than can be
found through private lenders. Some of these programs are designed for
buyers with bad credit, but most of the programs are tailored to help
those who lack the money for a down payment.
Not knowing your credit score
If you do not know your credit score going into the mortgage process,
you are operating at a distinct disadvantage. That is because your
credit score is the single most important number any potential lender
will consider when determining the size of the mortgage for which you
qualify, and the interest rate you will be required to pay. If your
credit report contains errors, they could adversely affect your credit
score, and cause you to be charged a higher interest rate than you would
otherwise be required to pay.
It is important to
pull a copy of your own credit score six months prior
to applying for a mortgage. This will give you plenty of time to
report any credit errors you find on your credit report, and to follow up to make sure
those errors have been rectified. A new law entitles every consumer to a
free annual copy of his or her credit report, so there is no reason not to do it.
Not getting a mortgage loan pre-approval
Many first time mortgage shoppers do not understand the difference
between being pre-qualified for a loan with being "pre-approved". The
process of pre-qualification can be quite a casual process, in which the
lender simply gives you a ballpark figure of how much you should qualify
for. The
pre-approval process is much more involved, and it means you actually apply for the loan.
The pre-approval process typically requires the potential home buyer to
submit financial information such as tax returns, pay stubs, etc. That
information is then verified by the lender, and a credit check is
performed. If the borrower passes the process, the lender will provide
proof in writing that the borrower is qualified for the loan.
Borrowing too much
Borrowing too much can be a huge mistake. Just because you qualify for a
big mortgage does not mean you should borrow that much. Many first time
home buyers do not understand all the expenses involved with owning a
home, and things like furniture purchases and home repairs can quickly
eat into emergency funds and leave you strapped for cash. It is far
better to avoid this problem by borrowing no more than you have to.
Paying excessive fees
Many mortgage lenders boost their bottom lines by tacking on a number of
fees. While some of these fees may be legitimate, others are
questionable and still others are totally unnecessary. For instance,
some lenders will charge so called "document preparation fees". In many
cases these fees pay for nothing more than having the computer print out
a simple form. Some lenders also charge inflated fees, such as charging
over $100 for a credit check that may have cost them only $10 or $15.
It is important to challenge these fees before you sign the loan papers.
After you have signed your name, you may be unable to recover any of
these fees.
Not shopping around for the best interest rate and loan terms
It is important for any potential mortgage holder to shop around for the
best interest rates and loan terms. It is important to shop around at a
variety of different lenders, and to make sure that the interest rate
you are offered is a good reflection of your credit report and credit
score. You already should have a copy of your credit score and credit
report in hand, and that should give you a good idea of the type of
interest rate you can expect. If you think the rate you are being
offered is too high, it may be time to shop around some more.
Forgetting about closing costs
It is important to remember that there will be closing costs, often significant
costs, that must be paid the day you take possession of your new home.
It is important to keep enough cash on hand to pay these closing costs.
Your lender should provide you with a good faith estimate of the closing
costs that will be required, but it is always better to err on the high
side.
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