Monday, October 18, 2010
6 Mortgage Mistakes That Most People Make
Mistake #1: They Have Unrepaired Credit
Your credit score and credit report are, unfortunately, a key factor in how a lender will determine what kind of interest rate they can offer you, while mitigating their own risks as much as possible. For this reason, it's very important to work on improving your score and removing unwanted items listed on your report if at all possible before applying for a mortgage - as this can drastically reduce your interest payments over time. As well, lower interest rates mean that you'll be paying less each month (immediately) for the same mortgage amount.
This can literally equate to saving thousands of dollars every year - money you can otherwise use for things like building up your savings, investing, or even just enjoying life a little more. There's no sense in making the bank even richer, just because of some "score" which you can often improve with simple financial management, or by taking care of some outstandig debts/collections.
Another thing to be aware of is that your credit report - which may list late payments, missed payments or debts sent to collections - is only going to provide "negative" information about your lending profile. In other words, a lender will only see the payment you missed last summer - they won't see that you've been faithfully paying every single month for 7 years.
Repairing your credit may not be the easiest thing at the time, but the process truly is a simple one, and both the long-term and short-term payoffs can be truly astounding.
It's well worth doing...
Mistake #2: They Don't Shop Around
Not all lenders are born equal, and often times certain lenders are only competitive in a certain area (such as commercial loans, or equity take-outs, etc.).
For this reason, the simple act of "shopping around" will be very revealing for you, as some companies simply do not offer competitive rates for certain types of loans, areas, borrower categories, etc. You'll be amazed, and it will save you a fortune just by finding the best possible lender for your needs, who is in the business of serving people like you.
Mistake #3: They Don't Get Pre-Approved
Most potential buyers/borrowers will get pre-qualified, but not necessarily pre-approved.
What's the difference?
Well, there's a big difference. Getting pre-qualified involves zero risk for the lender, and they're basically just saying "we might finance you if everything looks good and our underwriting team doesn't find any issues with you or the property - but no guarantees". You don't want to be going around signing real estate purchase agreements with that kind of off-the-cuff statement.
A pre-approval, on the other hand, is basically the same thing as applying for an actual mortgage, and getting approved - because you'll get an actual commitment from the lender, so long as the application details don't change when the time comes to actually press the button and apply "for real".
The bottom line is that you know exactly what you're working with when you get pre-approved. If you're parusing the real estate market and all you have is a pre-qualification, you really don't know what you can truly afford.
Mistake #4: They Borrow Too Much
It's the old adage of "just because you have it, doesn't mean you can afford to spend it".
Buying a home is certainly an exciting time, but don't fall into the trap of borrowing as much money as you possibly can to get your "dream" home. Your mortgage is only one of many expenses - even when it comes to your home itself.
Between maintenance, property taxes, insurance, inevitable repairs and necessary renovations, and possibly even legal issues - you need to have some "reserve" funds in place, as well as some positive cash-flow each month that you can use for savings (and living a little!)
And we're not even taking into account life's other expenses - car payments, insurance, kids, etc.
Getting approved for a mortgage isn't winning the lottery. You are locking yourself into a situation where you need to know for sure that you can either sell the house if times get tough and at the very least break-even (which, lately isn't something I'd be too confident about) - or make the payments for the duration of the loan term.
Being optimistic can be dangerous in the long run.
Be cautiously optimistic, and borrow what you can comfortably afford with confidence.
Mistake #5: They Pay “Bogus” Fees
Many people don't know this, but a lot of lenders will inflate the cost of basic things like "document preparation" (ie. pressing the print button), or charging $150 for a credit check that costs a mere fraction of that.
Some fees may be legitimate, but you owe it to yourself to find out exactly what the mortgage application will cost. You'll be paying these guys a small fortune in interest over the years, anyway, so there's no sense in paying a cent more than you need to.
Mistake #6: They Don't Budget for Closing Costs
Closing costs are almost always much higher than the borrower might think, and if you're not prepared for the lawyer's fees, taxes, transfer fees, pre-paid homeowners insurance, lender fees and so on.
This can turn into thousands of dollars - and a lot of people find themselves scrambling at the end of the mortgage approval process to scrounge up every last dime, max out every credit card they have and so on just to "make it work".
Obviously, this doesn't leave you in a good position for your first few months to a year of home ownership - which can also be the most expensive when you first get settled, maybe renovate a few things, etc.
Talk to your attorney and/or get a "good faith estimate" from your lender beforehand so you can properly estimate what you need to set aside for your closing costs.
In conclusion - this isn't meant to scare you off of getting a mortgage.
On the contrary, by simply addressing these mistakes now - and not later - you can get into a position where your mortgage can truly be a point of value, eventually turning itself into wealth as your property builds in value over time and the principal is paid down.
So be sure to recognize and avoid these mistakes.