The majority of Americans out there who are buying homes will have to assume a huge debt in the form of a mortgage. Considering the magnitude of this type of loan, you definitely want to make sure you’re making the best decision before you take it on.
First-time homebuyers who’ve never navigated the real estate and mortgage waters before should do their homework on mortgages, and have a solid grasp on their finances.
One thing’s for sure – a mortgage is something you don’t want to mess around with. But at the same time, the unfamiliarity of the home loan realm shouldn’t scare you off. With the right information, you can get an affordable home that’s right for you, your family and your finances.
If you go into the process armed with all the necessary information, you should come out unscathed. Having said that, here are some of the more common mortgage mistakes that first-time homebuyers make that you should be aware of so you don’t fall prey to them yourself.
Not Getting a Copy of Your Credit Report
Do you know what your current credit score is? If not, you’d better find out before you even start thinking of buying. If your credit is in good standing, great. If not, you need to find out why, and take steps to improve it. But you’re not going to know either way if you don’t request a copy of your credit report from one of the three major credit bureaus in the US.
You can easily obtain a copy of this report for free every 12 months. When you get it, make sure to look it over carefully to see if there are any mistakes on it that could be bringing your credit score down. If there are any errors, you can request to have an investigation opened. Even one incorrect delinquency can shave many points off your overall credit score.
If the delinquencies documented are legitimate, and your score has been negatively affected by them, do what’s necessary to bring that score back up. Pay your bills on time, get rid of high-interest credit card debt first, and avoid making any further purchases on credit (such as a car loan). If you don’t make an effort to improve your credit score, you could be stuck with a very high-interest rate on your mortgage, or may have your mortgage application denied completely.
Looking For a Home Before Your Get Pre-Approved For a Mortgage
Before you start pounding the pavement searching for the perfect abode, you should get pre-approved for a mortgage first. It’ll do you no good to agree to purchase a home at a listing price of $400,000 when you can realistically only afford a home worth $300,000. You’ll be left sorely disappointed if your offer is accepted, only to find out you can’t get a mortgage to finance it.
Your mortgage specialist will assess your financials and determine how much you can comfortably afford based your income and the amount of debt you have. At this point, you’ll be informed of roughly how much you can afford. Armed with this information, you and your real estate agent will be able to narrow down the homes that meet your criteria. This will avoid wasting your time and that of the sellers, and will prevent you from any setbacks.
Keep in mind that a pre-approval letter will come in handy when you are competing with other buyers for the same home. If another buyer is pre-approved and you’re not, the seller may overlook your offer. Many sellers won’t even consider offers that come from buyers who are not pre-approved for a mortgage, even if there are no other buyers in the picture.
Failing to Understand the Terms of Your Mortgage
The amount of your home loan and the interest rate attached to it are obviously important things to know about your mortgage, but there are other things you should also learn about it before you seal the deal. Is your rate fixed or adjustable? Can the rate change at any point during the life of the mortgage? How long is the term of your mortgage? Are you allowed to put more money towards your mortgage at any point? What are the fees associated with breaking your mortgage early?
There are plenty of questions that you should ask your mortgage specialist so that you fully understand everything about your home loan. Make sure not to sign anything until you’re totally in-the-know.
Allowing Yourself to Go ‘House Poor’
While you want to be able to put as much towards your down payment as possible, you also don’t want to drain your life’s savings. Putting at least 20% towards the purchase price will allow you to avoid paying Private Mortgage Insurance (PMI) and will lessen the loan amount. These are both obviously good things, but not at the expense of leaving you with next to nothing.
Further, you need to be careful about how much of a mortgage you actually take out. Even if you’re pre-approved for a maximum of $300,000, for instance, that doesn’t mean you should take that much out. Making a commitment to contribute a huge chunk of your income to mortgage payments will leave you with little at the end of each month. There are many other expenses that you need to cover, including utilities, property taxes, homeowners insurance, and HOA fees.
You need to have a social life too, which costs money. You don’t want to be stuck at home doing nothing simply because you barely have any leftover cash to enjoy yourself.
Not Comparing Mortgages
Many homebuyers – especially the newbies – get lured into locking into a mortgage because of a really low interest rate. While a low rate is great, there are also other fees that need to be taken into consideration. Many times these fees can end up making a lower-interest mortgage more expensive.
To prevent getting sucked into this trap, make sure you compare mortgages by more than just the interest rate. Instead, compare home loans by the annual percentage rate (APR), which combines the interest rate with closing costs and other fees. This will allow you to make a more accurate comparison so you can make a more informed decision on which mortgage to go with that will cost you less money in the long run.
The Bottom Line
Never sign anything unless you’ve done your homework first. That advice is gold for just about anything in life, especially when big money is on the line.