The Biggest Mortgage Mistakes People Make and How to Avoid Them
The mortgage process can be overwhelming for first-time homebuyers. Fortunately, there are many resources to help you along the way. It’s also a lot simpler than it used to be, thanks to technology and third-party services that take much of the stress out of buying a home. Even so, it’s not uncommon for people looking to buy a house to make mistakes when putting together their mortgage application.
The mortgage process requires a lot of documentation and attention to detail, which is why even seasoned real estate agents sometimes miss things. Don’t let that scare you away from your dream house. Just avoid these common pitfalls when getting your mortgage so you get the perfect home loan instead of an imperfect one:
Don’t apply for a loan too early
If you apply for a mortgage before you actually have a deal in place to buy a house, you risk falling into the trap of getting blinded by the commitment. You may end up accepting a loan with a higher interest rate for a longer term than you can really afford just to get the deal done. And if you fall in love with a specific house and then learn it’s not as affordable as you thought, you’re in a tough spot. You should finish your home search, select a real estate agent or a home loan specialist, and be ready to negotiate on the price of a house before you even apply for the loan. If you have your financing in order, the seller is more likely to accept your offer.
Don’t rely on an automated approval process
Automated algorithms have made it easier than ever to get a mortgage, but they don’t account for everything. What if your credit score was high but your down payment wasn’t as large as it should be? What if you have a high income but a high debt-to-income ratio? Even if you meet the automated requirements for a mortgage, your mortgage broker or lender may not approve your application.
The automated approval process may generate false positives that lead you to believe you’re ready for a mortgage when you’re not. Be prepared to submit additional documentation or negotiate on price with a seller if you’re using an automated approval process. Avoid disappointment by getting a firm commitment from your mortgage broker before you spend thousands on a home inspection.
Don’t forget to factor in other costs besides the down payment
You’ve heard a million times that you need to put 20% down on a house, but why? The main reason is it gives you equity in the home from day one. If you put only 5% down, you’re putting yourself at risk of being underwater on your mortgage if there’s a market correction and prices drop. Be aware that you’ll need a larger down payment if you plan to buy a house that’s expensive.
If you’re looking at a $700,000 house, you may need to put down $200,000 just to avoid paying mortgage insurance each month. You should also factor in closing costs, which can range from 2% to 7% of the home price. If you’re buying a house that’s less than $250,000, you’ll also have to pay a mortgage appraisal fee.
Don’t use only one lender
As a first-time homebuyer, you may be eager to find a lender that offers the lowest rate. But it’s not a good idea to lock yourself into a specific lender. You never know if you may need to refinance in the future, or if your mortgage company goes out of business. This can happen more often than you might expect. You also never know if rates will go up. If rates are high when you get your mortgage, you may be locked into a high rate for the life of the loan. Even if you’re happy with the terms of your mortgage, you may want to see what rates are like when you shop for the best mortgage refinance rates.
Don’t rely on the pre-approved rate
A pre-approved rate is a great tool for homebuyers looking to lock in a rate before shopping for a house. But don’t expect that rate to be the same as your mortgage rate. The mortgage lender will run your credit one or two more times to get a more accurate picture of your risk as a borrower. Multiple credit inquiries have a small impact on your credit score, but they are necessary when applying for a mortgage. You may not get the same rate as you did when you applied for a pre-approved mortgage.
Conclusion
The mortgage process can be overwhelming, but there are many resources to help you along the way. It’s also a lot simpler than it used to be, thanks to technology and third-party services that take much of the stress out of buying a home. Even so, it’s not uncommon for people looking to buy a house to make mistakes when putting together their mortgage application. The mortgage process requires a lot of documentation and attention to detail, which is why even seasoned real estate agents sometimes miss things. Don’t let that scare you away from your dream house. Just avoid these common pitfalls when getting your mortgage so you get the perfect home loan instead of an imperfect one.