Buying a home and going through the mortgage process can be stressful and have long-term negative consequences if you don’t avoid some of these common pitfalls.
(1) Not getting a fixed rate loan
Fixed-rate loans are no longer priced at record lows, so you might be tempted to grab an adjustable-rate mortgage. But unless you’re planning to move within five to seven years, you’ll be better off sticking with a fixed-rate loan.
Leonard Winslow, a loan officer with Movement Mortgage, LLC, says the job of a loan officer is to determine your long and short-term needs or goals and to find if there are any future life events. i.e. an inheritance, sale of a property or asset to determine if a large influx of liquid cash is coming into the household. “By determining those needs, the loan officer can determine if an adjustable rate may or may not be an alternative.”
(2) Letting the bank tell you what you can afford
Banks are in the business of maximizing their earnings, not making sure you don’t overextend yourself. “It is best to go to a Registered or Licensed loan officer to determine what you can afford in the form of sales price, loan amount, program or payment,” advised Winslow. “The loan officer will be versed in the programs available today and will take into consideration the taxes, homeowners insurance and mortgage insurance if required when determining the qualification. Many of the web sites won’t take those items into consideration.”
(3) Not checking your credit
A bad credit score can bump up your mortgage interest rate several percentage points or leave you with no approval at all. “Getting the credit score is not the most important thing but knowing what is on the report is more important,” Winslow said. “What borrowers don’t realize is that there are several scoring models and the score they think is a mortgage score is in fact a retail score, which is more liberal and typically higher.”
(4) Applying for new credit alongside the mortgage
If you happen to apply for a credit card or auto loan around the same time you apply for a mortgage, your credit score might get dinged enough to kill your eligibility or bump up your interest rate. “This is a major no-no,” said Winslow. “You should not disturb your credit before the process starts or during the mortgage process. New credit raises red flags and drops your credit score.”
(5) Ignoring the true cost of home ownership
A common mistake is not factoring principle, interest, taxes and insurance (PITI) into your overall mortgage budget. Even homeowner association fees should be considered. “You need to budget that item as you move forward,” said Winslow. “Other things you need to budget for is general maintenance, setting aside a few dollars for major items like a roof, heating and cooling units, water heaters and well pumps if they apply.”
(6) Job hopping
An underwriter will want to know that the income you bring in every month is consistent and expected to continue into the foreseeable future. “Moving from one job to another in the same field for more money or the same money with better benefits would be okay,” Winslow explained. “But if you are moving to chase a dollar and it is in various fields, then you will need to be on that job and considered full time for six months before applying for a loan.”
(7) Not getting pre-approved
“Getting pre-approved is paramount in giving you the buyer power when negotiating,” said Winslow. “Pre-approval allows you to set the program and parameters for you and your agent to work within. Most agents will not even place you in the car until you have at least spoken to a lender and then at offer time they will not submit the contract without a pre-approval or at the very least a pre-qualification. If you are able to be pre-approved before contract it could save you weeks or maybe months off of the closing date and possibly thousands of dollars off the sales price.”
(8) Forgetting to lock your rate
Mortgage rates change daily and sometimes several times daily. All those quotes you obtain are just quotes until you tell the bank, lender, or broker to lock it in. “Forgetting to lock the interest rate can be disastrous,” said Winslow. “It is not up to the loan officer to remind you. It is your responsibility to tell the lender to lock the rate after discussing what the rate is. A loan officer can only advise the plus and minus of locking or not locking into the rate on any given day. It is your responsibility to make sure—and get written confirmation—that the rate is locked when you tell the loan officer to do so.”
(9) Putting little or no money down
If you’re putting little to nothing down, you’re looking at several potential problems. “While it is great to be able to reduce the amount of funds that are needed for closing, there is a risk that occurs also,” said Winslow. “The less money you put down the less equity you will have in the home. If you plan to move in three years you may not be able to recoup what you put into the home or cover the other costs of selling the home.”
(10) Not reading your loan documents
Finally, it’s your responsibility to read and accept the terms of your new mortgage. Yes, it’s a pain to go through all of the loan documents at signing, but it’s a bigger pain to sign up for something you don’t want or agree with. Take the time at closing to ensure you understand everything you’re signing, and thereby agreeing to. “Loan documents are legal contracts and as such should be read and understood,” said Winslow. “At the closing table many documents/disclosures will be re-signed, but the two most important are the Note (your promise to pay) and the Deed of Trust, which provides the remedies in the case of foreclosure or slow payment and spells out what can or cannot be done to the property.”
People make smart mortgage choices every day. This list of common mortgage mistakes you should avoid will turn you into a savvy borrower so that owning your home will be a joy, not a burden, and will help you achieve long-term financial security.
By Joanne DiMaggio