Don’t make the mistake of getting so excited about buying a home/getting a mortgage that you commit some of the top mortgage mistakes. A mortgage is a big undertaking that has strict requirements. Knowing what you need to do and how to do it can help you have a smooth process.
Mistake: Not Educating Yourself About Mortgages
Before you even apply for a mortgage, you need to know what to expect. There are many different mortgage programs and even types of mortgages within each program. Do you need an FHA, USDA, VA, or conventional loan? If you don’t qualify for any of those, is a subprime loan an option? Do you know what a subprime loan is all about?
You can figure out which program best suits you by knowing the mortgage guidelines. Here are the basics:
- FHA loans – You need a 580 credit score, 31% housing ratio, 41% total debt ratio, and a 3.5% down payment
- USDA loans – You need a 640 credit score, 29% housing ratio, 41% total debt ratio, no down payment, but the home must be rural according to the USDA guidelines
- VA loans – You need a 620 credit score, 41% – 43% total debt ratio, no down payment, but you must be a veteran of the military, Reserves, or National Guard
- Conventional loans – You need a 680 credit score, 28% housing ratio, 36% total debt ratio, and a 5% down payment
Using these basic guidelines, you can tell which loan program may suit you the most. You can also talk to your loan officer about your options.
Mistake: Not Understanding the Terms Available
Choosing the mortgage program is one thing, but you also have to choose the mortgage term. You must choose the length of the loan, such as 15, 20, or 30 years as well as the type of interest rate. Do you want a fixed interest or adjustable? Most loan programs offer both options.
- Fixed interest rate – This rate never changes throughout the life of the loan. The rate you lock in before the closing is the rate you keep for the duration of the loan.
- Adjustable interest rate – This rate changes after an initial fixed period, typically 3 – 5 years. The rate adjusts on an annual basis according to the margin and index that the lender assigns.
You should go through the various terms and types of interest rates to see which option fits best in your budget now and well into the future.
Mistake: Agreeing to Pay Points Without Considering Your Options
When a lender tells you that you have to pay 2 points to get approved for a mortgage, it’s easy to agree just so that you can get the mortgage. Don’t jump the gun, though. There may be other options available to you.
If a lender tells you that the loan will cost you 2 points, make sure that you ask what your loan would look like without the points. Sometimes they charge points just to give you a lower interest rate and lure you into the loan. They may have other options that are more affordable. Points are always a necessity and they aren’t right for every borrower. You need to look at the big picture to see what the loan costs you at the end to see what is right.
Mistake: Taking the Full Loan Amount That a Lender Pre-Approves you For
Getting pre-approved is one of the best things you can do. This way you know where you stand and that you have a mortgage should you find a home. Don’t take the pre-approval at face value, though. The lender will pre-approve you for the maximum loan amount that you qualify to obtain – this doesn’t mean that you should take that full loan amount, though.
Once you obtain your pre-approval, see how the payment and loan amount stack up with your budget. Just because you can get a mortgage for $400,000, for example, doesn’t mean that you should. Look closely at the payment, the closing costs, and the long-term effect of the loan in order to choose the loan option that is right for you.
It’s nice to know the maximum amount of loan and/or purchase price that you can afford, but don’t assume you have to use the full amount.
Mistake: Forgetting the Extra Costs of Homeownership
Owning a home costs a lot more than just paying the seller the agreed upon purchase price. Once you own the home, you have utilities, taxes, routine maintenance, and repairs to consider.
Before you agree to buy the home, talk to the seller and/or realtor about the cost of owning the home. What are the typical utility bills? What are the taxes and how often have they increased over the years? What’s the homeowner’s insurance like? Has the owner filed any claims on their homeowner’s insurance in the last few years?
As far as maintenance and repairs, a general rule is to figure 1% of the home’s value. If a home is worth $300,000, expect to spend an extra $3,000 in maintenance and repairs. Some years you’ll spend more than this and some you’ll spend less, but it averages out to be about 1% of the home’s value.
Mistake: Not Shopping Around for a Mortgage
It can be exciting to hear the words ‘you’re approved,’ but don’t get too excited. We recommend that you get quotes from at least three lenders to make sure you are getting the best deal. Each lender has different interest rates and closing costs, even within the same mortgage program.
Obtaining Loan Estimates from at least three lenders will help you compare your options side-by-side. Make your decision carefully as this could affect the next 30 years of your life if this is your forever home and you don’t refinance.
Take your time when shopping for a mortgage. Don’t just take the first offer thrown at you. Consider your options and really look at the big picture to make sure that you get the mortgage that is just right for you.Click to See the Latest Mortgage Rates»